Service Tax

Q: What is Service tax? A:Service tax is an indirect tax levied under the Finance Act, 1994, as amended from time to time, on services. At present, there are approximately 96 categories (including 15 new services introduced by B 2006) of services taxable under the service tax net. Q: What is the rate of service tax and are there different rates for different categories or a rate across all categories? A:Service tax is levied at a uniform rate of 12.24 percent (including education cess of 2 percent) from date of enactment of Finance Bill, 2006 Q: List of new services that have been brought under this tax net in Budget 2006-07? A: The new services made taxable include services provided by share transfer agents and registrar to recovery agents, maintenance and management of Automatic Teller Machines, sale of advertising space (except for print media), sponsorship of events by companies (except for sports), public relations mana services, ship management services, international air travel (excluding economy class), rail container ha services (excluding haulage charges), cruise ship travel, Internet telephony services, business support auctioneers’ service (excluding auction of property under directions or orders of a court of law or auct the government) and credit card, debit card and other payment card-related services. Q: What is the value of service liable to service tax? A: The value of service generally liable to service tax is the gross amount charged by the service prov service rendered. Out of pocket expenses such as (travel, lodging, etc) paid on behalf of the client and recovered on actual basis (supported by documentary evidence) have been clarified for certain service being liable to service tax. However, the Finance Act, 2006 substitutes a new section 67 in the place of the existing one for valua the taxable service under different circumstances such as, consideration for service rendered was par money or partly for consideration other than money. Further, pursuant to the Finance Act, 2006, 'Service Tax (Determination of Value) Rules, 2006' ('Valu Rules') have been introduced which specifies different principles for valuation depending upon the nat consideration. The Valuation Rules have also prescribed certain conditions which have to be fulfilled by service provider to claim a deduction on account of expenditure/ cost incurred by him in provision of a As a result, various costs which are charged to the client as 'out of pocket' expenses (on which reimbu is claimed) would be subject to service tax if the specified conditions are not satisfied. Q: Who is liable to deposit Service tax? A: Generally, the liability to deposit service tax is on the service provider. However, in case service is by a person based (ie having a business/ fixed establishment from where service is provided/ permane address/ place of residence) outside India and such service provider does not have an office in India, person liable to deposit service tax is the service recipient based in India. Further, with respect to 'goods transport agency services', if the consignee or consignor is a company corporation, body corporate, factory, etc the service tax is required to be paid by the person liable to freight instead of the goods transport agency. Q: Are export of services liable to service tax? A: No, as per the Export of Services Rules, 2005 (effective from March 15, 2005), export of services liable to service tax. Further, vide notification no. 11/ 2005 -ST, rebate of service tax paid on exporte services has been granted subject to certain conditions. Further, vide notification 12/ 2005 - ST, reba excise duty on inputs and service tax paid on input services used in providing the exported service has granted subject to certain conditions. Q: Is service tax leviable on services received from outside India? A: Prior to introduction of Finance Act, 2006, explanation to Section 65(105) of the Finance Act, 1994 (inserted vide Finance Act, 2005) levied service tax on taxable services rendered by a service provide

outside India (ie having a business/ fixed establishment from where service is provided/ permanent ad place of residence outside India) to a person based in India. Under the Finance Act, 2006 a new Section 66A has been introduced. This Section provides for levy o tax on the services rendered by a service provider residing outside India to a person based in India. F such cases, it is deemed that the service recipient in India has himself provided the taxable service in and, accordingly, service tax is payable by the service recipient. In addition to Section 66A, Taxation of Services (Provided from Outside India and received in India) R 2006 have been notified which lay down the criteria (similar to Export of Services Rules) based on w service would be treated as ‘imports’ and thus be liable to service tax. Q: Who is authorized to administer Service tax in the country? A: The different jurisdictional Commissionerates of Central Excise and Director General of Service ta authorized to administer service tax in India. Registration Q: What is the procedure for obtaining a Service tax registration? A: A prospective Service tax assessee seeking registration should file an application in Form ST-1 (in d with the jurisdictional Central Excise officer/ Service Tax officer within 30 days from the date on wh service becomes taxable or from the commencement of the provision of a taxable service, as may be a The application is required to be filed, generally, along with the following documents1. 2. 3. 4.

A copy of the PAN of the service provider; The memorandum and articles of association of the establishment providing the services; An address proof of the establishment from which it functions; AND A power of attorney of the authorized signatory for the purposes of the said registration.

The requirement for filing the above stated documents (other than Form ST-1) is not prescribed in st may vary from one jurisdiction to another. Department is required to issue the registration certificate to the assessee within 7 days of the rece application. In case of failure to issue registration certificate within 7 days, the registration applied f deemed to have been granted and the assessee can carry on its activities. The registration certificate a service tax registration number. Q: Is separate registration certificate number required for, if the service provider is providing m than one taxable service? A: A single registration certificate number can be obtained for all services. However, the applicant sh mention all taxable service categories on the registration application. Q: In case of a registered service provider, providing a new taxable service, is he required to ob fresh registration? A:Service tax registration needs to be obtained for each taxable service category. In case a service p already has a service tax registration certificate, the service provider would need to get the service t registration certificate amended for the addition of the new taxable service category in the certifica Q: Is there any prescribed period for intimation of change in information at the time of registra A: The service provider is required to intimate any change in information submitted to the Central Exc Officer at the time of registration within 30 days of the said change. Q: If an assessee is providing services from more than one premise, does he have to obtain regis for each premise? A: To answer the above question, three situations are contemplated and discussed below:

1. Where the assessee is providing the service from more than one premises and has centralized b

system: When an assessee is providing taxable service from more than one premise or office an centralized billing system in respect of such service rendered to clients in one or more such pre offices, he may opt for registering such premises or offices from where such centralized billing 2. Where the assessee is providing the services from more than one premises and has centralized accounting system: Where an assessee is providing services from more than one premise or offi has a centralized accounting system in one or more such premises or offices, he may opt for reg of such premises or offices from where centralized accounting is done. 3. Where the assessee is providing service from more than one premises but does not have central billing system or centralized accounting system: Where an assessee is providing a taxable servic more than one premise or office, but does not have any centralized billing system or centralized accounting system, he would be required to obtain registration in respect of each of such premis offices from where the services are rendered.

Q: What is the procedure for obtaining the service tax code ('STC') number? A: An application in the prescribed format (in duplicate), as provided in Annexure II of CBEC Service Circular No. 35/3/2001 dated 27 August 2001, along with a certified copy of the PAN card, has to be submitted to the Superintendent of Central Excise. Q: What are the consequences for failure to obtain registration? A: There is no specific penalty for failure to obtain registration. However, as per residuary penalty cla penalty for contravention where no specific penalty is provided), penalty which may extend to Rs 1000 leviable. Payment of tax, filing of return and maintenance of records Q: What is the basis for the deposit of service tax by an assessee and at what intervals? Is se to be deposited by the assessee, even in cases where his client does not pay for the services ren or only pays a part of the bill raised in this regard? A: The service tax is required to be paid only on the value of taxable services received for a particula or quarter, as the case may be, and not on the gross amount charged or billed to the client. Ordinarily tax should be deposited on a monthly basis. However, individual proprietary firms or partnership firms required to deposit tax quarterly. In both the cases, whether monthly or quarterly, the tax is to be de by the 5th of the month following the said month or the said quarter. However, tax for the month of M required to be deposited by March 31. Service tax is required to be deposited through TR 6 challans. Please note that in all cases where the amount received is less than the gross amount charged/ billed t client, the service tax assessees are required to amend the bills, either by rectifying the existing bill a revised bill and by properly endorsing such change in the billed amount. In case payments have been made in advance for services which have not been provided as yet, service required to be deposited on such advance amounts also. Q: What is the consequence of delay of deposit of tax? A: Any service provider not depositing tax within the time stipulated for the same, has to pay simple i at the rate of 13 percent per annum. In addition, the assessee may required to pay penalty ranging between Rs 100/- and Rs 200/- for ever delay up to a maximum penalty which is equivalent to the service tax which has not been deposited. The levy of penalty is at the discretion of the authorities. However, as per the amendment introduced by the Finance Act, 2006, the assessee is required to pay not less than Rs. 200/day of delay or 2% of the tax per month of delay, whichever is higher up to a ma penalty which is equivalent to the service tax which has not been deposited. The actual levy of penalty discretion of the authorities.

Q: At what intervals do service tax assesses have to file service tax returns? What are the doc that have to be filed along with service tax returns Statement? A: The service tax assesses are required to file a half yearly return in Form ST 3 or ST-3A, in triplica the Superintendent Central Excise dealing with service tax. The returns have to be filed within 25 day the last day of the particular half-year. Thus, the returns for half year ending September 30, and Ma have to be filed by October 25, and April 25, respectively. The returns should be accompanied by copi TR 6 challans, evidencing payment of service tax. Further, an assessee filing service tax returns for the first time should also furnish to the Departmen of all the accounts maintained by them relating to service tax. Q: What are the consequences for failure to submit returns? A: There is no specific penalty for failure to obtain registration. However, as per residuary penalty cla penalty for contravention where no specific penalty is provided), penalty which may extend to an amoun exceeding Rs 1000/- may be leviable. Q: What are the records required to be maintained by an assessee? A: No specific records are required to be maintained by a service tax assessee. Records required to b maintained under any other law in force (sales tax, income tax etc) are acceptable for the purpose of s tax. Service tax credit Q: Is service tax credit available for services utilized by a service provider? A: Yes, an output service provider is allowed to avail credit of the service tax/ excise duty paid on inp services/ input goods received and consumed, which are in relation to rendering of output services. Q: What are the documents needed to avail service tax credit? A:Service tax credit can be availed on the basis of the following documents: 1. Credit of service tax paid on input services can be availed on the basis of invoice, bill or challan issue input service provider which should contain the following details: 1. 2. 3. 4. 5. 6.

Date of invoice Serial number of document Name, address and registration number of the input service provider Name and address of the service recipient Descripttion, classification and value of input service Service tax paid/ payable.

2. Credit of service tax paid on input services received by an input service distributor can be availed o basis of invoice, bill or challan issued by an input service distributor which should contain the following

1. Date of invoice 2. Serial number of the document 3. Name, address and registration number of the person providing input services and the serial num date of the invoice, bill or challan (as provided hereinabove) 4. Name and address of the input service distributor 5. Name and address of the recipient of the credit distributed 6. Amount of credit distributed.

3. Credit of excise duty paid on inputs/ capital goods can be availed of on the basis of an invoice issued 1. A manufacturer for clearance of inputs or capital goods; or

2. An importer; or 3. A first stage dealer or second stage dealer; or 4. Supplementary invoice issued by a manufacturer or importer of inputs or capital goods; or Bill of or 5. Certificate issued by an appraiser of customs in respect of goods imported through a foreign po

Q: What records need to be maintained to avail service tax credit? A: The manufacturer/ output service provider should maintain proper records for receipt, disposal, consumption and inventory of input and capital goods. There is no specified format in which the record be maintained. However, the manufacturer/ output service provider needs to maintain records contain information regarding the value, tax/ duty paid, cenvat credit availed and credit utilized, person from inputs/ capital goods/ services are procured. Q:Whether a service tax credit return needs to be filed? A: Yes, an output service provider is obliged to file a return, on half yearly- basis, in the prescribed fo indicating details of input service provider, input service tax credit available, credit utilized and the b available, if any, along with the return to be filed in Form ST-3. The returns for half year ending Sept 30, and March 31, have to be filed by October 25, and April 25, respectively. General exemptions Q: What are the general exemptions available from service tax across all taxable service catego A: Exemptions from service tax available across all taxable service categories are:

1. All taxable services provided by any person to the United Nations or any International agency, a defined, shall be exempt from paying service tax related to those services. [Notification no. 16/ dated August 2, 2002] 2. All taxable services provided to a developer or units of SEZ for the development, operation and maintenance of a SEZ or for setting up SEZ unit or for manufacture of goods buy the SEZ unit been exempted from service tax, subject to satisfaction of the prescribed procedural requirem [Notification No.17/2002/ST dated November 21, 2002] 3. The value of goods and materials that are sold by the service provider to the recipient of servic provided there is documentary proof specifically indicating the value of the goods and materials [Notification no 12/2003/ST effective July 1, 2003] 4. All taxable services rendered by the RBI have been exempted from service tax w.e.f. March 1, 2

Information Technology related services Q: What are the relevant taxable service categories for a person providing Information Technolo ('IT') related services? A: Depending of the nature of IT services provided by a person, the following taxable service categor be relevant: Consulting engineer service means service provided by a professionally qualified engineer or any body c or any other firm who, either directly or indirectly, renders any advice, consultancy or technical assist any manner to a client in one or more disciplines of engineering excluding services provided in relation discipline of computer hardware engineering or computer software engineering. Management consultant service means any service provided by any person, either directly or indirectly connection with the management of any organization in any manner and includes any advice, consultancy technical assistance, in relation to financial management, human resources management, marketing man production management, logistics management, procurement and management of information technolog resources or other similar areas of management.

Commercial training or coaching service means any training or coaching provided by any institute or establishment providing commercial training or coaching for imparting skill or knowledge or lessons on subject or field other than the sports, with or without issuance of a certificate and includes coaching tutorial classes but does not include preschool coaching and training centre or any institute or establis which issues any certificate or diploma or degree or any educational qualification recognized by law for time being in force. Internet cafe service means service provided in relation to access of internet by any commercial estab providing facility for accessing internet. Management, maintenance or repair service means any service provided by• any person under a contract or agreement or • a manufacturer or any person authorized by him, in relation to i. management of properties, whether immoveable or not; or ii. maintenance or repair including reconditioning or restoration or servicing of any of any goods, exclud motor vehicle. Any service in relation to maintenance or repair or servicing of software have been clarified as being l service tax under this service category vide Circular No 81/2/2005 - ST dated 7 October 2005. Online information and data base access or retrieval service means any service provided by a commerc concern, for provision of data or information, retrievable or otherwise, to a customer, in electronic for through a computer network. Erection, commissioning or installation service means any service provided by a commissioning and insta agency in relation to erection, commissioning or installation of plant, machinery or equipment, structure whether or not pre-fabricated, electrical and electronic devices, plumbing, drain laying, etc for transp fluid, heating or air conditioning, thermal or sound insulation, fire proofing, lift and escalators, and sim services. Business auxiliary service means any service in relation to • • • • • • •

promotion or marketing or sale of goods produced or provided by or belonging to the client; or promotion or marketing of service provided by the client; or any customer care service provided on behalf of the client; or procurement of goods or services, which are inputs for the client; or production of goods on behalf of the client; or provision of service on behalf of the client; or any incidental or auxiliary support service such as billing, collection or recovery of cheques, acco remittance, evaluation of prospective customer and public relation services, and includes service commission agent, but does not include any information technology service.

"Information technology service" has been defined to mean any service in relation to designing or deve computer software, system networking, or any other service primarily in relation to operation of compu systems. Definition of ‘business auxiliary services’ specifically excludes information technology service from the of service tax. However, w.e.f 1 May 2006, the definition of information technology services was narro exclude services in relation to ‘maintaining of computer software, or computerized data processing’ fro purview. Business auxiliary service has been clarified to include the services of evaluation of prospective custom processing of purchase orders, customer management, information and tracking of delivery schedules, accounting and processing of transactions, operational assistance for marketing, formulation of custom service and pricing policies, managing distribution & logistics. Further, it has been clarified that the se

provided in relation to getting a customer, verification of prospective customer, processing of purchas etc would also be covered under service tax, as the law specifically provides for inclusion of such servi business auxiliary support services. Circular 59/8/2003 dated June 20, 2003] Support services of business or commerce means services provided in relation to business or commerce includes evaluation of prospective customers, telemarketing, processing of purchase orders and fulfillm services, information and tracking of delivery schedules, managing distribution and logistics, customer relationship management services, accounting and processing of transactions, operational assistance fo marketing, formulation of customer service and pricing policies, infrastructural support services and o transaction processing. Infrastructural support services include providing office along with office utilities, lounge, and recept competent personnel to handle messages, secretarial services, internet and telecom facilities, pantry a security. Automated teller machine operations, maintenance or management service means any service provided relation to automated teller machines and includes site selection, contracting of location, acquisition, f installation, certification, connection, maintenance, transaction processing, cash forecasting, replenish reconciliation and value-added services. Automated teller machine means an interactive automatic machine designed to dispense cash, accept d cash, transfer money between bank accounts and facilitate other financial transactions. Internet telephony means telecommunication service through internet and includes fax, audio conferen video conferencing. 'Internet' means a global information system which is logically linked together by a globally unique add based on Internet Protocol or its subsequent enhancements or upgradations and is able to support communications using the Transmission Control Protocol or Internet Protocol suite or its subsequent enhancements or upgradations and all other Internet Protocol compatible protocols. Services in relation to sale of space or time means services provided, in relation to sale of space or tim advertisement, in any manner but does not include sale of space for advertisement in print media and s time slots by a broadcasting agency or organisation. Such services include:

1. providing space or time, as the case may be, for display, advertising, showcasing of any product service in video programmes, television programmes or motion pictures or music albums, or on bi public places, buildings, conveyances, cell phones, automated teller machines, internet; 2. selling of time slots on radio or television by a person, other than a broadcasting agency or orga and 3. aerial advertising. Q: What are the exemptions available with respect to IT related services? A: The exemptions available with respect to IT related services are: •

•

Consulting engineer service- As per the definition of 'taxable service', services provided by a co engineer in the discipline of computer hardware engineering or computer software engineering a taxable. Business auxiliary service- The definition of business auxiliary services excludes information tec services, which is any service in relation to designing or developing of computer software, system networking, and any other services primarily related to operation of computers, are excluded fr ambit of business auxiliary service category. [Explanation to section 65 (19) of the Finance Act,

•

Commissioning or installation service- The taxable service provided in relation to commissioning installation by a commissioning and installation agency, has been exempted from so much of the tax leviable as is in excess of the amount of service tax calculated on a value which is equivalent thirty-three per cent of the gross amount charged from the customer under a contract for supp plant, machinery or equipment and commissioning or installation of the said plant, machinery or equipment, subject to the prescribed conditions..Explanation: - For the purposes of this notifica gross amount charged shall include the value of the plant, machinery, equipment, parts and any o material sold by the commissioning and installation agency, during the course of providing commi or installation service. [Notification no 1/2006/ST dated 1 March 2006]

Q: What is Service tax? A:Service tax is an indirect tax levied under the Finance Act, 1994, as amended from time to time, on specified services. At present, there are approximately 96 categories (including 15 new services introduced by Budget 2006) of services taxable under the service tax net. Q: What is the rate of service tax and are there different rates for different categories or a common rate across all categories? A:Service tax is levied at a uniform rate of 12.24 percent (including education cess of 2 percent) from the date of enactment of Finance Bill, 2006 Q: List of new services that have been brought under this tax net in Budget 2006-07? A: The new services made taxable include services provided by share transfer agents and registrar to issues, recovery agents, maintenance and management of Automatic Teller Machines, sale of advertising space or time (except for print media), sponsorship of events by companies (except for sports), public relations management services, ship management services, international air travel (excluding economy class), rail container handling services (excluding haulage charges), cruise ship travel, Internet telephony services, business support services, auctioneers’ service (excluding auction of property under directions or orders of a court of law or auction by the government) and credit card, debit card and other payment card-related services. Q: What is the value of service liable to service tax? A: The value of service generally liable to service tax is the gross amount charged by the service provider for service rendered. Out of pocket expenses such as (travel, lodging, etc) paid on behalf of the client and recovered on actual basis (supported by documentary evidence) have been clarified for certain services as not being liable to service tax. However, the Finance Act, 2006 substitutes a new section 67 in the place of the existing one for valuation of the taxable service under different circumstances such as, consideration for service rendered was partly in money or partly for consideration other than money. Further, pursuant to the Finance Act, 2006, 'Service Tax (Determination of Value) Rules, 2006' ('Valuation Rules') have been introduced which specifies different principles for valuation depending upon the nature of consideration. The Valuation Rules have also prescribed certain conditions which have to be fulfilled by a service provider to claim a deduction on account of expenditure/ cost incurred by him in provision of a service. As a result, various costs which are charged to the client as 'out of pocket' expenses (on which reimbursement is claimed) would be subject to service tax if the specified conditions are not satisfied. Q: Who is liable to deposit Service tax?

A: Generally, the liability to deposit service tax is on the service provider. However, in case service is provided by a person based (ie having a business/ fixed establishment from where service is provided/ permanent address/ place of residence) outside India and such service provider does not have an office in India, then the person liable to deposit service tax is the service recipient based in India. Further, with respect to 'goods transport agency services', if the consignee or consignor is a company, corporation, body corporate, factory, etc the service tax is required to be paid by the person liable to pay freight instead of the goods transport agency. Q: Are export of services liable to service tax? A: No, as per the Export of Services Rules, 2005 (effective from March 15, 2005), export of services is not liable to service tax. Further, vide notification no. 11/ 2005 -ST, rebate of service tax paid on exported services has been granted subject to certain conditions. Further, vide notification 12/ 2005 - ST, rebate of excise duty on inputs and service tax paid on input services used in providing the exported service has been granted subject to certain conditions. Q: Is service tax leviable on services received from outside India? A: Prior to introduction of Finance Act, 2006, explanation to Section 65(105) of the Finance Act, 1994 (inserted vide Finance Act, 2005) levied service tax on taxable services rendered by a service provider residing outside India (ie having a business/ fixed establishment from where service is provided/ permanent address/ place of residence outside India) to a person based in India. Under the Finance Act, 2006 a new Section 66A has been introduced. This Section provides for levy of service tax on the services rendered by a service provider residing outside India to a person based in India. Further, in such cases, it is deemed that the service recipient in India has himself provided the taxable service in India and, accordingly, service tax is payable by the service recipient. In addition to Section 66A, Taxation of Services (Provided from Outside India and received in India) Rules, 2006 have been notified which lay down the criteria (similar to Export of Services Rules) based on which a service would be treated as ‘imports’ and thus be liable to service tax. Q: Who is authorized to administer Service tax in the country? A: The different jurisdictional Commissionerates of Central Excise and Director General of Service tax are authorized to administer service tax in India. Registration Q: What is the procedure for obtaining a Service tax registration? A: A prospective Service tax assessee seeking registration should file an application in Form ST-1 (in duplicate) with the jurisdictional Central Excise officer/ Service Tax officer within 30 days from the date on which the service becomes taxable or from the commencement of the provision of a taxable service, as may be applicable. The application is required to be filed, generally, along with the following documents1. A copy of the PAN of the service provider; 2. The memorandum and articles of association of the establishment providing the services; 3. An address proof of the establishment from which it functions; AND 4. A power of attorney of the authorized signatory for the purposes of the said

registration. The requirement for filing the above stated documents (other than Form ST-1) is not prescribed in statute and may vary from one jurisdiction to another. Department is required to issue the registration certificate to the assessee within 7 days of the receipt of the application. In case of failure to issue registration certificate within 7 days, the registration applied for is deemed to have been granted and the assessee can carry on its activities. The registration certificate contains a service tax registration number. Q: Is separate registration certificate number required for, if the service provider is providing more than one taxable service? A: A single registration certificate number can be obtained for all services. However, the applicant should mention all taxable service categories on the registration application. Q: In case of a registered service provider, providing a new taxable service, is he required to obtain a fresh registration? A:Service tax registration needs to be obtained for each taxable service category. In case a service provider already has a service tax registration certificate, the service provider would need to get the service tax registration certificate amended for the addition of the new taxable service category in the certificate. Q: Is there any prescribed period for intimation of change in information at the time of registration? A: The service provider is required to intimate any change in information submitted to the Central Excise Officer at the time of registration within 30 days of the said change. Q: If an assessee is providing services from more than one premise, does he have to obtain registration for each premise? A: To answer the above question, three situations are contemplated and discussed below: 1. Where the assessee is providing the service from more than one premises and has centralized billing system: When an assessee is providing taxable service from more than one premise or office and has a centralized billing system in respect of such service rendered to clients in one or more such premises or offices, he may opt for registering such premises or offices from where such centralized billing is done. 2. Where the assessee is providing the services from more than one premises and has centralized accounting system: Where an assessee is providing services from more than one premise or office but has a centralized accounting system in one or more such premises or offices, he may opt for registration of such premises or offices from where centralized accounting is done. 3. Where the assessee is providing service from more than one premises but does not have centralized billing system or centralized accounting system: Where an assessee is providing a taxable service from more than one premise or office, but does not have any centralized billing system or centralized accounting system, he would be required to obtain registration in respect of each of such premises or offices from where the services are rendered. Q: What is the procedure for obtaining the service tax code ('STC') number? A: An application in the prescribed format (in duplicate), as provided in Annexure II of CBEC Service tax Circular No. 35/3/2001 dated 27 August 2001, along with a certified copy of the PAN card, has to be submitted to the Superintendent of Central Excise.

Q: What are the consequences for failure to obtain registration? A: There is no specific penalty for failure to obtain registration. However, as per residuary penalty clause (ie penalty for contravention where no specific penalty is provided), penalty which may extend to Rs 1000/- may be leviable. Payment of tax, filing of return and maintenance of records Q: What is the basis for the deposit of service tax by an assessee and at what intervals? Is service tax to be deposited by the assessee, even in cases where his client does not pay for the services rendered or only pays a part of the bill raised in this regard? A: The service tax is required to be paid only on the value of taxable services received for a particular month or quarter, as the case may be, and not on the gross amount charged or billed to the client. Ordinarily service tax should be deposited on a monthly basis. However, individual proprietary firms or partnership firms are required to deposit tax quarterly. In both the cases, whether monthly or quarterly, the tax is to be deposited by the 5th of the month following the said month or the said quarter. However, tax for the month of March is required to be deposited by March 31. Service tax is required to be deposited through TR 6 challans. Please note that in all cases where the amount received is less than the gross amount charged/ billed to the client, the service tax assessees are required to amend the bills, either by rectifying the existing bill or issuing a revised bill and by properly endorsing such change in the billed amount. In case payments have been made in advance for services which have not been provided as yet, service tax is required to be deposited on such advance amounts also. Q: What is the consequence of delay of deposit of tax? A: Any service provider not depositing tax within the time stipulated for the same, has to pay simple interest at the rate of 13 percent per annum. In addition, the assessee may required to pay penalty ranging between Rs 100/- and Rs 200/for every day of delay up to a maximum penalty which is equivalent to the service tax which has not been deposited. The actual levy of penalty is at the discretion of the authorities. However, as per the amendment introduced by the Finance Act, 2006, the assessee is required to pay penalty not less than Rs. 200/day of delay or 2% of the tax per month of delay, whichever is higher up to a maximum penalty which is equivalent to the service tax which has not been deposited. The actual levy of penalty is at the discretion of the authorities. Q: At what intervals do service tax assesses have to file service tax returns? What are the documents that have to be filed along with service tax returns Statement? A: The service tax assesses are required to file a half yearly return in Form ST 3 or ST-3A, in triplicate, to the Superintendent Central Excise dealing with service tax. The returns have to be filed within 25 days from the last day of the particular half-year. Thus, the returns for half year ending September 30, and March 31, have to be filed by October 25, and April 25, respectively. The returns should be accompanied by copies of all TR 6 challans, evidencing payment of service tax. Further, an assessee filing service tax returns for the first time should also furnish to the Department the list of all the accounts maintained by them relating to service tax. Q: What are the consequences for failure to submit returns? A: There is no specific penalty for failure to obtain registration. However, as per residuary penalty clause (ie penalty for contravention where no specific penalty is provided), penalty

which may extend to an amount not exceeding Rs 1000/- may be leviable. Q: What are the records required to be maintained by an assessee? A: No specific records are required to be maintained by a service tax assessee. Records required to be maintained under any other law in force (sales tax, income tax etc) are acceptable for the purpose of service tax. Service tax credit Q: Is service tax credit available for services utilized by a service provider? A: Yes, an output service provider is allowed to avail credit of the service tax/ excise duty paid on input services/ input goods received and consumed, which are in relation to rendering of output services. Q: What are the documents needed to avail service tax credit? A:Service tax credit can be availed on the basis of the following documents: 1. Credit of service tax paid on input services can be availed on the basis of invoice, bill or challan issued by an input service provider which should contain the following details: 1. 2. 3. 4. 5. 6.

Date of invoice Serial number of document Name, address and registration number of the input service provider Name and address of the service recipient Descripttion, classification and value of input service Service tax paid/ payable.

2. Credit of service tax paid on input services received by an input service distributor can be availed on the basis of invoice, bill or challan issued by an input service distributor which should contain the following details: 1. Date of invoice 2. Serial number of the document 3. Name, address and registration number of the person providing input services and the serial number and date of the invoice, bill or challan (as provided hereinabove) 4. Name and address of the input service distributor 5. Name and address of the recipient of the credit distributed 6. Amount of credit distributed. 3. Credit of excise duty paid on inputs/ capital goods can be availed of on the basis of an invoice issued by: 1. 2. 3. 4.

A manufacturer for clearance of inputs or capital goods; or An importer; or A first stage dealer or second stage dealer; or Supplementary invoice issued by a manufacturer or importer of inputs or capital goods; or Bill of entry; or 5. Certificate issued by an appraiser of customs in respect of goods imported through a foreign post office. Q: What records need to be maintained to avail service tax credit? A: The manufacturer/ output service provider should maintain proper records for receipt, disposal, consumption and inventory of input and capital goods. There is no specified format in

which the records need to be maintained. However, the manufacturer/ output service provider needs to maintain records containing information regarding the value, tax/ duty paid, cenvat credit availed and credit utilized, person from whom inputs/ capital goods/ services are procured. Q:Whether a service tax credit return needs to be filed? A: Yes, an output service provider is obliged to file a return, on half yearly- basis, in the prescribed form (III) indicating details of input service provider, input service tax credit available, credit utilized and the balance available, if any, along with the return to be filed in Form ST-3. The returns for half year ending September 30, and March 31, have to be filed by October 25, and April 25, respectively. General exemptions Q: What are the general exemptions available from service tax across all taxable service categories? A: Exemptions from service tax available across all taxable service categories are: 1. All taxable services provided by any person to the United Nations or any International agency, as defined, shall be exempt from paying service tax related to those services. [Notification no. 16/2002/ST dated August 2, 2002] 2. All taxable services provided to a developer or units of SEZ for the development, operation and maintenance of a SEZ or for setting up SEZ unit or for manufacture of goods buy the SEZ unit have been exempted from service tax, subject to satisfaction of the prescribed procedural requirements. [Notification No.17/2002/ST dated November 21, 2002] 3. The value of goods and materials that are sold by the service provider to the recipient of service provided there is documentary proof specifically indicating the value of the goods and materials. [Notification no 12/2003/ST effective July 1, 2003] 4. All taxable services rendered by the RBI have been exempted from service tax w.e.f. March 1, 2006. Information Technology related services Q: What are the relevant taxable service categories for a person providing Information Technology ('IT') related services? A: Depending of the nature of IT services provided by a person, the following taxable service categories may be relevant: Consulting engineer service means service provided by a professionally qualified engineer or any body corporate or any other firm who, either directly or indirectly, renders any advice, consultancy or technical assistance in any manner to a client in one or more disciplines of engineering excluding services provided in relation to the discipline of computer hardware engineering or computer software engineering. Management consultant service means any service provided by any person, either directly or indirectly, in connection with the management of any organization in any manner and includes any advice, consultancy or technical assistance, in relation to financial management, human resources management, marketing management, production management, logistics management, procurement and management of information technology resources or other similar areas of management. Commercial training or coaching service means any training or coaching provided by any institute or establishment providing commercial training or coaching for imparting skill or

knowledge or lessons on any subject or field other than the sports, with or without issuance of a certificate and includes coaching or tutorial classes but does not include preschool coaching and training centre or any institute or establishment which issues any certificate or diploma or degree or any educational qualification recognized by law for the time being in force. Internet cafe service means service provided in relation to access of internet by any commercial establishment providing facility for accessing internet. Management, maintenance or repair service means any service provided by• any person under a contract or agreement or • a manufacturer or any person authorized by him, in relation to i. management of properties, whether immoveable or not; or ii. maintenance or repair including reconditioning or restoration or servicing of any of any goods, excluding motor vehicle. Any service in relation to maintenance or repair or servicing of software have been clarified as being liable to service tax under this service category vide Circular No 81/2/2005 - ST dated 7 October 2005. Online information and data base access or retrieval service means any service provided by a commercial concern, for provision of data or information, retrievable or otherwise, to a customer, in electronic form through a computer network. Erection, commissioning or installation service means any service provided by a commissioning and installation agency in relation to erection, commissioning or installation of plant, machinery or equipment, structures, whether or not pre-fabricated, electrical and electronic devices, plumbing, drain laying, etc for transport of fluid, heating or air conditioning, thermal or sound insulation, fire proofing, lift and escalators, and similar services. Business auxiliary service means any service in relation to • • • • • • •

promotion or marketing or sale of goods produced or provided by or belonging to the client; or promotion or marketing of service provided by the client; or any customer care service provided on behalf of the client; or procurement of goods or services, which are inputs for the client; or production of goods on behalf of the client; or provision of service on behalf of the client; or any incidental or auxiliary support service such as billing, collection or recovery of cheques, accounts and remittance, evaluation of prospective customer and public relation services, and includes services as a commission agent, but does not include any information technology service.

"Information technology service" has been defined to mean any service in relation to designing or developing of computer software, system networking, or any other service primarily in relation to operation of computer systems. Definition of ‘business auxiliary services’ specifically excludes information technology service from the purview of service tax. However, w.e.f 1 May 2006, the definition of information technology services was narrowed to exclude services in relation to ‘maintaining of computer software, or computerized data processing’ from its purview. Business auxiliary service has been clarified to include the services of evaluation of prospective customers, processing of purchase orders, customer management, information and

tracking of delivery schedules, accounting and processing of transactions, operational assistance for marketing, formulation of customer service and pricing policies, managing distribution & logistics. Further, it has been clarified that the services provided in relation to getting a customer, verification of prospective customer, processing of purchase order etc would also be covered under service tax, as the law specifically provides for inclusion of such services as business auxiliary support services. Circular 59/8/2003 dated June 20, 2003] Support services of business or commerce means services provided in relation to business or commerce and includes evaluation of prospective customers, telemarketing, processing of purchase orders and fulfillment services, information and tracking of delivery schedules, managing distribution and logistics, customer relationship management services, accounting and processing of transactions, operational assistance for marketing, formulation of customer service and pricing policies, infrastructural support services and other transaction processing. Infrastructural support services include providing office along with office utilities, lounge, and reception with competent personnel to handle messages, secretarial services, internet and telecom facilities, pantry and security. Automated teller machine operations, maintenance or management service means any service provided in relation to automated teller machines and includes site selection, contracting of location, acquisition, financing, installation, certification, connection, maintenance, transaction processing, cash forecasting, replenishment, reconciliation and value-added services. Automated teller machine means an interactive automatic machine designed to dispense cash, accept deposit of cash, transfer money between bank accounts and facilitate other financial transactions. Internet telephony means telecommunication service through internet and includes fax, audio conferencing and video conferencing. 'Internet' means a global information system which is logically linked together by a globally unique address, based on Internet Protocol or its subsequent enhancements or upgradations and is able to support communications using the Transmission Control Protocol or Internet Protocol suite or its subsequent enhancements or upgradations and all other Internet Protocol compatible protocols. Services in relation to sale of space or time means services provided, in relation to sale of space or time for advertisement, in any manner but does not include sale of space for advertisement in print media and sale of time slots by a broadcasting agency or organisation. Such services include: 1. providing space or time, as the case may be, for display, advertising, showcasing of any product or service in video programmes, television programmes or motion pictures or music albums, or on billboards, public places, buildings, conveyances, cell phones, automated teller machines, internet; 2. selling of time slots on radio or television by a person, other than a broadcasting agency or organisation; and 3. aerial advertising. Q: What are the exemptions available with respect to IT related services? A: The exemptions available with respect to IT related services are: •

Consulting engineer service- As per the definition of 'taxable service', services provided by a consulting engineer in the discipline of computer hardware engineering or

•

•

computer software engineering are not taxable. Business auxiliary service- The definition of business auxiliary services excludes information technology services, which is any service in relation to designing or developing of computer software, system networking, and any other services primarily related to operation of computers, are excluded from the ambit of business auxiliary service category. [Explanation to section 65 (19) of the Finance Act, 1994] Commissioning or installation service- The taxable service provided in relation to commissioning or installation by a commissioning and installation agency, has been exempted from so much of the service tax leviable as is in excess of the amount of service tax calculated on a value which is equivalent to thirty-three per cent of the gross amount charged from the customer under a contract for supplying a plant, machinery or equipment and commissioning or installation of the said plant, machinery or equipment, subject to the prescribed conditions..Explanation: - For the purposes of this notification, the gross amount charged shall include the value of the plant, machinery, equipment, parts and any other material sold by the commissioning and installation agency, during the course of providing commissioning or installation service. [Notification no 1/2006/ST dated 1 March 2006]

Best Answer - Chosen by Voters West Bengal has created its respective professional tax slab structure to keep the residents informed about the exact deductions from their incomes. The professional tax slab in West Bengal has been categorized as per the following criteria: Income Monthly Professional Tax Less than 1,500 Nil Between Rs. 1501- Rs. 2001 Rs. 18 Between Rs. 2001 - Rs. 3001 Rs. 25 Between Rs. 3001- 5001 Rs 30 Rs. 5001 Rs. 40 Between Rs. 6001 -7001 Rs.45 Rs.7001 Rs.50 Rs.8001 Rs.90 Rs.9001 Rs.110 Rs.15001 Rs.130 Rs. 25001 Rs.150 Beyond Rs.40001 Rs.200

Source(s): http://business.mapsofindia.com/india-ta… •

2 years ago

TAXABLE SERVICES

Name of service 1. Advertising services

2. Air Travel Agent Services 3. Architect Services 4. Authorised service station 5. Banking and Other Financial Services 6. Beauty Parlour Services 7. Broadcasting Service 8. Business Auxiliary Services, namely Business Promotion and Support Services including Customer Care Services (Excluding any information Technology Services) 9. Cable Operator Services 10. Cargo Handling Services 11. Certification Service 12. Chartered Accountant Services 13. Clearing & Forwarding Agent services 14. Commercial Vocational Institutes, coaching centres and private Tutorials 15. Commissioning and Installation Services 16. Company Secretary Services 17. Consultant Engineer services 18. Convention Service 19. Cost Accountant Services 20. Couriers services 21. Credit Rating Agency Services 22. Custom House Agent services 23. Dry Cleaning Services 24. Event Management Services 25. Fascimile Service 26. Fashion Designing Services 27. Franchisee Services 28. General Insurance Services 29. Health Clubs and Fitness Centers Services 30. Insurance Auxiliary Services 31. Interior Decorators/Designers Services 32. Internet Cafe 33. Leased Circuits Service 34. Life Insurance Service including Insurance auxiliary Services relating to Life Insurance 35. Maintenance and Repair Services 36. Man Power Recruitment services 37. Management Consultant Services 38. Mandap Keeper Services 39. Market Research Agency Services 40. Online Information and Database access and / or Retrieval Service 41. Photography Service 42. Port Services 43. Radio Paging Services 44. Rail Travel Agent services 45. Real Estate Agents 46. Rent-a-Cab Scheme Operator Services 47. Scientific & Technical Consultancy Service 48. Security / Detective Agency Services 49. Sound Recording Service 50. Steamer Agent Services 51. Stock Broker Services 52. Storage and Warehousing Services 53. Telegraph Service 54. Telephone Services 55. Telex Service 56. Tour Operator services 57. Under Writing Services 58. Video Tape Production Service Circular No. 59/8/2003 20th June, 2003 F. No. B3/7/2003-TRU Government of India Ministry of Finance Department of Revenue Tax Research Unit Subject: Imposition of Service Tax on new services consequent to enactment of Finance Bill, 2003-reg. 1. APPOINTMENT OF EFFECTIVE DATE FOR THE NEW SERVICES It may be recalled that the Finance Act, 2003 has made provisions to levy service tax, from a date to be notified later on, on the following new services,-

o Commercial training & coaching center o Technical testing & analysis; technical inspection and certification o Maintenance and repair service o Commissioning and installation o Business auxiliary services o Internet café o Franchise service Further, it was also provided in the Finance Act to extend the scope of services already covered under the tax net in case of,o port services (which were earlier limited to major ports) to cover all ports under the service tax net; o authorised automobile service was brought under the tax net with effect from 16.7.2001. However, it was restricted only to motorcars and two wheeled motor vehicles. Buses, trucks, maxi cabs etc were not covered. Provision have been made to widen the scope of authorized automobile service to cover all such vehicles; o foreign exchange broking service provided by any body corporate or non-banking financial company was covered under the tax net in the category of banking and other financial service with effect from 16.7.2001. Provisions have been made to extend the scope of the tax to include the service provided by all foreign exchange brokers (including moneychangers and forex dealers). As per the provisions of the Finance Act, the above levies or extensions of levies are to come into effect from a date to be appointed by the Central government. In this regard, vide notification No.7/2003-Service Tax, date 20th June 2003, the government has appointed 1st July, 2003, as the date from which the levy of Service tax on the above services would come into effect. 2. EXEMPTIONS AND CLARIFICATIONS 2.1 BUSINESS AUXILIARY SERVICE: 2.1.1 Call centers and medical transcription centers: Business auxiliary services provided by call centers (i.e. commercial concern which provides assistance, help or information, through telephone, on behalf of another person) and medical transcription centers (i.e. commercial concern which transcribes medical history, treatment, medical observations and the like) have been fully exempted from levy of service tax w.e.f. 1st July, 2003, vide notification No. 8/2003-Service Tax, dated 20th June, 2003. 2.1.2 Commission agent: As per the definition of business auxiliary services, services as commission agent are considered business auxiliary services. However services of commission agents have been exempted from service tax w.e.f. 1st July, 2003 vide notification No.13/2003-Service Tax dated 20th June 2003. Commission agent has been defined in the notification, as a person who causes sale or purchase of goods, on behalf of another person for a consideration, which is based on the quantum of such sale or purchase. It may be noticed that the exemption under this notification is for a commission agent while the services of a consignment agent remain taxable under the category of Clearing and Forwarding services. It may be appreciated that the nature of service provided by a Consignment agent is different than that provided by a commission agent. A consignment agent’s job is to receive the goods from the principal and dispatch them on the directions of the principal, whereas a commission agent’s job is to cause sale/purchase on behalf of another person. Thus, the essential difference is that a commission agent sells or purchases on behalf of the principal while consignment agent receives and dispatches the goods on behalf of a principal. It is possible that a person may be a consignment agent as well as a commission agent. Such a person would already be covered in the category of Clearing and Forwarding agent and would be liable to pay service tax in that category. In other words, the present exemption is available only to such commission agent who is not a consignment agent. 2.1.3 Certain doubts have been raised in case of business auxiliary services. In this regard the following is clarified,• While it is not possible to give an exhaustive list of business auxiliary services, the following are illustrations of services that are covered under this category viz. evaluation of prospective customers, processing of purchase orders, customer management, information and tracking of delivery schedules, accounting and processing of transactions, operational assistance for marketing, formulation of customer service and pricing policies, managing distribution & logistics. The services provided in relation to getting a customer, verification of prospective customer, processing of purchase order etc would also be covered under service tax, as the law specifically provides for inclusion of such services as business auxiliary support services. • As regards the question whether insurance agents, C&F agents working on commission basis fall under the definition of business auxiliary service, it is clarified that they do not, as they are specifically covered within the definition of other specified taxable services, namely the Insurance service and C&F Service respectively. Under Section 65A of Finance Act 1994, it has also been provided that in case of overlap, a service would be classified under the head, (a) which provides most specific description, (b) in case of a composite service having combination of different taxable services, the service which give them their essential character and (c) in case the test of (a) and (b) does not resolve, the service which comes earlier in the clauses of Section 65, i.e. the service that was subjected to service tax earlier. Since Insurance services and C&F Services are more specific description and were also subjected to service tax prior to imposition of tax on business auxiliary service, the insurance agents, C&F agents working on commission basis would fall under those respective categories. From this, it follows that a particular service can be taxed only under one head of service. • As per the definition of business auxiliary services, information technology service is outside the purview of business auxiliary service. In the explanation appended to the definition in the Act itself, it has been clarified that information technology service means any service in relation to designing, developing or maintaining of computer software or computerized data processing or system networking or any other service primarily in relation to operation of computer systems. In this regard, it is clarified that only if the output service provided by a service provider is in the nature of the above operations, such exclusion would operate. The mere fact that a personal computer or a laptop has been used for

providing the service does not, ipso facto, make the service an information technology service. Similarly, the fact that any of the IT services mentioned in the explanation has been used by the service provider as an input service does not automatically make the output service an IT service. Therefore, in such cases, individual service has to be examined with reference to the explanation provided to the definition of business auxiliary service and only such output services which qualify to be IT services in terms of the said explanation shall remain excluded from taxable service under the heading business auxiliary service. 2.2 VOCATIONAL TRAINING AND COACHING CENTERS: 2.2.1 Commercial coaching and training services provided by institutes that prepare applicants for Board examinations and competitive exams like entrance examinations for Indian Institute of Technology-Joint Entrance Examinations/Pre Medical Tests, Civil Services exams etc. are chargeable to service tax. However, services in relation to commercial coaching and training, provided by, a. vocational training institute; b. computer training institute; and c. recreational training institute; have been exempted from service tax w.e.f. 1st July, 2003 vide Notification No.9/2003-Servtice Tax dated 20th June 2003. Therefore, vocational coaching and training services provided by typing and shorthand institutes, TV/ vehicle repair training institutes, tailoring institutes, industrial training institutes, foreign language institutes, computer-training centers, hobby classes, institutes teaching martial arts, painting, dancing etc would not be chargeable to service tax. This exemption would remain in force upto 29th February 2004. 2.2.2 Institutes like the Institute of Chartered Accountants of India some time hire the services of other institutes to impart some part of training (like language or computer training) to the students undertaking courses for obtaining recognized degrees/diplomas (like Chartered Accountancy) from their institute. Whereas institutes the Institute of Chartered Accountants of India will not be chargeable to service tax because they confer qualifications recognized by law, the institutes or centers providing such part of training may be otherwise under service tax net. Vide notification No. 10/2003Service Tax dated 20th June, 2003, exemption has been provided w.e.f. 1st July, 2003 to such services rendered by commercial training or coaching centers from service tax which form an essential part of the course or curriculum leading to issuance of recognized certificate, diploma, degree or any other educational qualification. The exemption is subject to the condition that the receiver of such service (for example, student) makes payment for the entire course or curriculum to the institute or establishment issuing such certificate, diploma etc. and not to the commercial coaching or training center. 2.2.3 Certain doubts have been raised in case of commercial coaching and training. In this regard, the following is clarified,• Whether service tax is leviable on postal coaching: It is clarified that service tax is leviable on any coaching or training provided by an institution on commercial basis. Therefore, the coaching provided by postal means would also be covered under the service tax and the charges, including the postal charges collected for rendering this service would be subjected to service tax. • Whether service tax is leviable on institutes providing commercial coaching in addition to recognized degree courses: Some institutes like colleges, apart from imparting education for obtaining recognized degrees/diploma/certificates, also impart training for competitive examinations, various entrance tests etc. It is clarified that by definition, such institutes or establishments, which issue a certificate, diploma or degree recognized by law, are outside the purview of "commercial training or coaching institute". Thus, even if such institutes or establishments provide training for competitive examinations etc., such services rendered would be outside the scope of service tax. • Whether individuals going to houses to impart tuition/coaching would be chargeable to service tax: It is clarified that service tax is on institutions/establishments. Therefore, only those service providers are covered under the service tax who have some establishment for providing commercial coaching or training i.e. institutional coaching or training. Thus, individuals providing services at the premises of a service receiver would not be covered under service tax. However, if coaching or training center provides commercial coaching by sending individuals to the premises of service receivers, such services would be chargeable to tax, as in this case, the individuals are rendering services on behalf of an institution. • Whether free summer training/ in house training provided by employers to their employees are covered under service tax net: It is clarified that in case employers provide any free training themselves, no service tax is chargeable. However if an employer hires an outside commercial coaching or training center for imparting some training to its employees, then the payment made by the said employer to such coaching center will be chargeable to service tax. 2.3 MAINTENANCE AND REPAIR SERVICES: 2.3.1 Maintenance contracts entered into before 1st July 2003: There are cases where maintenance contracts are entered into for a period of more than one year. Vide notification No.11/2003- Service Tax, dated 20th June 2003 for maintenance contracts entered into prior to 1st July, 2003, exemption has been provided to that part of the value of the service for which bill/invoices have been raised and the amount has actually been received prior to the 1st July, 2003. For such contracts, all subsequent payments or payments made against invoice issued subsequent to the 1st July 2003 will be chargeable to service tax. Similar will be situation for payments made for continuing services. 2.3.2 Certain doubts have been raised in case of maintenance and repair services as to whether service tax on maintenance and repair would be charged in cases where during the guarantee period, the services are provided to the buyer of the goods while the payments for the same are received from the supplier of the goods. In this regard it is clarified that irrespective of the fact that the receiver of the service is different from the person making payments for such services, the service tax is leviable on the services provided towards maintenance and repair. Therefore, for the services provided during the warranty period by the dealer or any other authorized person, service tax would also be leviable on

any amount received by such dealer or such other authorized person from manufacturer of such goods. 2.4 FRANCHISE SERVICE: Franchise service is a service provided by franchisor to a franchisee. Section 65 of the Finance Act 1994, (sub section 47) defines franchise as a specific type of agreement. This agreement has various ingredients, which have been specified in the said definition. For removal of doubt it is clarified that unless all the ingredients mentioned at (i) to (iv) of the said sub section are satisfied, the agreement can not be called as franchise agreement. These ingredients are,(i) the franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified with franchisor, whether or not a trade mark, service mark, trade name or logo or any such symbol, as the case may be, is involved; (ii) the franchisor provides concepts of business operation to franchisee, including know how, method of operation, managerial expertise, marketing techniques or training and standards of quality control except passing on the ownership of all know how to franchisee; (iii) the franchisee is required to pay to the franchisor, directly or indirectly, a fee; and (iv) the franchisee is under an obligation not to engage in selling or providing similar goods or services or process, identified with any other person. For example, the mere fact that a principal manufacturer has allowed production of goods bearing his brand name by another person under ‘License Production Agreement`, does not make the agreement a Franchise Agreement. A franchise agreement also includes the franchisee being obliged to follow the concept of business operation, managerial expertise, market techniques etc. of the franchisor and is under an obligation not to engage in selling, producing or providing similar goods or services, identified with any other person. Therefore, in the absence of such ingredients, a mere licensed production cannot be called as a franchise agreement and accordingly the license fees paid for such license production cannot be charged to service tax. 2.5 TECHNICAL INSPECTION AND CERTIFICATION SERVICES: A doubt has been raised whether certification given in respect of immovable property should fall under the purview of ‘technical inspection and certification services`. In this regard it may be recalled that earlier, CBEC vide its order No. 1/1/2002, dated 26.02.2003, issued under Section 37B (of the Central excise Act as made applicable to service tax) had clarified that certification given under authority of any code or statute can not be considered as a consulting engineer service. However, the new service included in 2003 budget, namely ‘technical inspection and certification services` would cover certification of all types including that of immovable property. Therefore, it is clarified that such services become taxable from the notified date. 2.6 COMMISSIONING AND INSTALLATION SERVICES: Certain doubts have been raised in case of commercial coaching and training . In this regard, the following is clarified,• In case of commissioning and installation it has been pointed out that in case of turnkey project, the contract may be indivisible and no separate value could be assigned to commissioning or installation of goods. Doubts have also been raised as to what would be the value of taxable service. It is submitted that it has been provided in law that service tax is leviable on erection and commissioning charges only and not on the material and goods supplied. However, it is upto the service provider to show the break-up of commissioning or installation charges. In case service provider shows consolidated charges, service tax would be leviable on such consolidated amount. • A doubt has been raised as to whether charges for erection of plant are covered under the service tax or only commissioning and installation charges. It is clarified that the law specifically provides for taxation of commissioning and installation of plant, machinery or equipment. Thus all activities other than the commissioning and installation of the plant/machinery/equipment per se, will not be chargeable to service tax. 2.7 MANDAP KEEPER SERVICE: Religious places like parish hall, temples etc provide services as mandap keeper for hosting of social and religious functions. Though such services are liable to service tax under the mandap keeper services, vide notification No.14/2003Service Tax, 20th June, 2003 services provided by the religious centers as mandap keeper in their precincts have been exempted from service tax. 2.8 CREDIT OF SERVICE TAX PAID ON TELEPHONES: In regard to credit of service tax on telephone connection, queries have been raised as to whether service tax credit would be admissible on telephone sets installed only in the business premises. The answer is in the affirmative, and credit will be allowed only on telephone sets installed in the business premises. Mobile phones are not covered. 2.9 MISCELLANEOUS ISSUES: 2.9.1 In case of authorized service stations, maintenance or repair services, commissioning and installation services and photography services it has been provided in the law that the cost of goods and material shall not form part of the value to be subjected to service tax, if evidence (like sale invoice/bill) shows that these goods were sold. Such dispensation has, however, not been provided for other services like commercial coaching and training centers, telecom services. In this regard, a general exemption under Notification No. 12/2003-service Tax, dated 20th June, 2003 has been issued exempting that part of the value of all taxable services from service tax, which represents the cost of goods or material sold by the service provider to the receiver of such services during the course of provision of the taxable services. This exemption would be available only in cases where the sale of such goods is evidenced and the sale value is quantified and shown separately in the invoice. It is also clarified that in case of commercial training and coaching institutes, the exclusion shall apply only to the sale value of standard textbooks, which are priced. Any study material or written text provided by such institute as a part of service which does not satisfy the above criteria will be subjected to service tax. 2.9.2 In case of a non-resident service provider who does not have any office in India, the service receiver in India is liable to pay service tax. A doubt has been raised as to how such receiver would avail the service tax credit. As per the existing law, in such cases service receiver is required to take registration, to pay service tax and to comply with other procedural formalities. As there is no bar under service tax law on the service tax payer to take the same amount back as credit, the service receiver after having paid the service tax on behalf of the non-resident service provider, can take credit of the same on the basis of document/ bill/invoice under which he paid the service tax.

2.9.3 Though the new rate of service tax of 8% came into force from 14 th May, 2003 on existing 51 services, and would come into effect from 1st July, 2003 in case of new services and extensions of services, in certain cases service providers have reportedly collected service tax @ 8% on such services, even prior to these specified dates. In such cases, unless the amount is refunded back to service receiver, the service provider is required to deposit amount equal to such duty collected in excess of that is leviable, as per the provisions of the service tax law. 3. The contents of this circular may be given wide publicity so that no difficulty is faced by the trade as well as the departmental officers in their observance and implementation. Apart from issuance of trade notice, wide publicity in the form of press releases and advertisement may also be given. Meetings/Seminars/ Consultations with the trade may be conducted to clarify the new provisions and clarifications relating thereto. Any difficulty faced by the trade in observance, by the officers in implementation or other issues pertaining to the new levies may be brought to the notice of the undersigned. However, references for clarifications pertaining to existing services may be made to Member (Service Tax) or to CX-4 Section.

TAXABLE SERVICES Name of service 1. Advertising services 2. Air Travel Agent Services 3. Architect Services 4. Authorised service station 5. Banking and Other Financial Services 6. Beauty Parlour Services 7. Broadcasting Service 8. Business Auxiliary Services, namely Business Promotion and Support Services including Customer Care Services (Excluding any information Technology Services) 9. Cable Operator Services 10. Cargo Handling Services 11. Certification Service 12. Chartered Accountant Services 13. Clearing & Forwarding Agent services 14. Commercial Vocational Institutes, coaching centres and private Tutorials 15. Commissioning and Installation Services 16. Company Secretary Services 17. Consultant Engineer services 18. Convention Service 19. Cost Accountant Services 20. Couriers services 21. Credit Rating Agency Services 22. Custom House Agent services 23. Dry Cleaning Services 24. Event Management Services 25. Fascimile Service 26. Fashion Designing Services 27. Franchisee Services 28. General Insurance Services 29. Health Clubs and Fitness Centers Services 30. Insurance Auxiliary Services 31. Interior Decorators/Designers Services 32. Internet Cafe 33. Leased Circuits Service 34. Life Insurance Service including Insurance auxiliary Services relating to Life Insurance 35. Maintenance and Repair Services 36. Man Power Recruitment services 37. Management Consultant Services 38. Mandap Keeper Services 39. Market Research Agency Services 40. Online Information and Database access and / or Retrieval Service 41. Photography Service 42. Port Services 43. Radio Paging Services 44. Rail Travel Agent services 45. Real Estate Agents 46. Rent-a-Cab Scheme Operator Services 47. Scientific & Technical Consultancy Service 48. Security / Detective Agency Services 49. Sound Recording Service 50. Steamer Agent Services 51. Stock Broker Services

52. Storage and Warehousing Services 53. Telegraph Service 54. Telephone Services 55. Telex Service 56. Tour Operator services 57. Under Writing Services 58. Video Tape Production Service Circular No. 59/8/2003 20th June, 2003 F. No. B3/7/2003-TRU Government of India Ministry of Finance Department of Revenue Tax Research Unit Subject: Imposition of Service Tax on new services consequent to enactment of Finance Bill, 2003-reg. 1. APPOINTMENT OF EFFECTIVE DATE FOR THE NEW SERVICES It may be recalled that the Finance Act, 2003 has made provisions to levy service tax, from a date to be notified later on, on the following new services,o Commercial training & coaching center o Technical testing & analysis; technical inspection and certification o Maintenance and repair service o Commissioning and installation o Business auxiliary services o Internet café o Franchise service Further, it was also provided in the Finance Act to extend the scope of services already covered under the tax net in case of,o port services (which were earlier limited to major ports) to cover all ports under the service tax net; o authorised automobile service was brought under the tax net with effect from 16.7.2001. However, it was restricted only to motorcars and two wheeled motor vehicles. Buses, trucks, maxi cabs etc were not covered. Provision have been made to widen the scope of authorized automobile service to cover all such vehicles; o foreign exchange broking service provided by any body corporate or non-banking financial company was covered under the tax net in the category of banking and other financial service with effect from 16.7.2001. Provisions have been made to extend the scope of the tax to include the service provided by all foreign exchange brokers (including moneychangers and forex dealers). As per the provisions of the Finance Act, the above levies or extensions of levies are to come into effect from a date to be appointed by the Central government. In this regard, vide notification No.7/2003-Service Tax, date 20th June 2003, the government has appointed 1st July, 2003, as the date from which the levy of Service tax on the above services would come into effect. 2. EXEMPTIONS AND CLARIFICATIONS 2.1 BUSINESS AUXILIARY SERVICE: 2.1.1 Call centers and medical transcription centers: Business auxiliary services provided by call centers (i.e. commercial concern which provides assistance, help or information, through telephone, on behalf of another person) and medical transcription centers (i.e. commercial concern which transcribes medical history, treatment, medical observations and the like) have been fully exempted from levy of service tax w.e.f. 1st July, 2003, vide notification No. 8/2003-Service Tax, dated 20th June, 2003. 2.1.2 Commission agent: As per the definition of business auxiliary services, services as commission agent are considered business auxiliary services. However services of commission agents have been exempted from service tax w.e.f. 1st July, 2003 vide notification No.13/2003-Service Tax dated 20th June 2003. Commission agent has been defined in the notification, as a person who causes sale or purchase of goods, on behalf of another person for a consideration, which is based on the quantum of such sale or purchase. It may be noticed that the exemption under this notification is for a commission agent while the services of a consignment agent remain taxable under the category of Clearing and Forwarding services. It may be appreciated that the nature of service provided by a Consignment agent is different than that provided by a commission agent. A consignment agent’s job is to receive the goods from the principal and dispatch them on the directions of the principal, whereas a commission agent’s job is to cause sale/purchase on behalf of another person. Thus, the essential difference is that a commission agent sells or purchases on behalf of the principal while consignment agent receives and dispatches the goods on behalf of a principal. It is possible that a person may be a consignment agent as well as a commission agent. Such a person would already be covered in the category of Clearing and Forwarding agent and would be liable to pay service tax in that category. In other words, the present exemption is available only to such commission agent who is not a consignment agent. 2.1.3 Certain doubts have been raised in case of business auxiliary services. In this regard the following is clarified,• While it is not possible to give an exhaustive list of business auxiliary services, the following are illustrations of services that are covered under this category viz. evaluation of prospective customers, processing of purchase orders, customer management, information and tracking of delivery schedules, accounting and processing of transactions, operational assistance for marketing, formulation of customer service and pricing policies, managing distribution & logistics. The services provided in relation to getting a customer, verification of prospective customer, processing of

purchase order etc would also be covered under service tax, as the law specifically provides for inclusion of such services as business auxiliary support services. • As regards the question whether insurance agents, C&F agents working on commission basis fall under the definition of business auxiliary service, it is clarified that they do not, as they are specifically covered within the definition of other specified taxable services, namely the Insurance service and C&F Service respectively. Under Section 65A of Finance Act 1994, it has also been provided that in case of overlap, a service would be classified under the head, (a) which provides most specific description, (b) in case of a composite service having combination of different taxable services, the service which give them their essential character and (c) in case the test of (a) and (b) does not resolve, the service which comes earlier in the clauses of Section 65, i.e. the service that was subjected to service tax earlier. Since Insurance services and C&F Services are more specific description and were also subjected to service tax prior to imposition of tax on business auxiliary service, the insurance agents, C&F agents working on commission basis would fall under those respective categories. From this, it follows that a particular service can be taxed only under one head of service. • As per the definition of business auxiliary services, information technology service is outside the purview of business auxiliary service. In the explanation appended to the definition in the Act itself, it has been clarified that information technology service means any service in relation to designing, developing or maintaining of computer software or computerized data processing or system networking or any other service primarily in relation to operation of computer systems. In this regard, it is clarified that only if the output service provided by a service provider is in the nature of the above operations, such exclusion would operate. The mere fact that a personal computer or a laptop has been used for providing the service does not, ipso facto, make the service an information technology service. Similarly, the fact that any of the IT services mentioned in the explanation has been used by the service provider as an input service does not automatically make the output service an IT service. Therefore, in such cases, individual service has to be examined with reference to the explanation provided to the definition of business auxiliary service and only such output services which qualify to be IT services in terms of the said explanation shall remain excluded from taxable service under the heading business auxiliary service. 2.2 VOCATIONAL TRAINING AND COACHING CENTERS: 2.2.1 Commercial coaching and training services provided by institutes that prepare applicants for Board examinations and competitive exams like entrance examinations for Indian Institute of Technology-Joint Entrance Examinations/Pre Medical Tests, Civil Services exams etc. are chargeable to service tax. However, services in relation to commercial coaching and training, provided by, a. vocational training institute; b. computer training institute; and c. recreational training institute; have been exempted from service tax w.e.f. 1st July, 2003 vide Notification No.9/2003-Servtice Tax dated 20th June 2003. Therefore, vocational coaching and training services provided by typing and shorthand institutes, TV/ vehicle repair training institutes, tailoring institutes, industrial training institutes, foreign language institutes, computer-training centers, hobby classes, institutes teaching martial arts, painting, dancing etc would not be chargeable to service tax. This exemption would remain in force upto 29th February 2004. 2.2.2 Institutes like the Institute of Chartered Accountants of India some time hire the services of other institutes to impart some part of training (like language or computer training) to the students undertaking courses for obtaining recognized degrees/diplomas (like Chartered Accountancy) from their institute. Whereas institutes the Institute of Chartered Accountants of India will not be chargeable to service tax because they confer qualifications recognized by law, the institutes or centers providing such part of training may be otherwise under service tax net. Vide notification No. 10/2003Service Tax dated 20th June, 2003, exemption has been provided w.e.f. 1st July, 2003 to such services rendered by commercial training or coaching centers from service tax which form an essential part of the course or curriculum leading to issuance of recognized certificate, diploma, degree or any other educational qualification. The exemption is subject to the condition that the receiver of such service (for example, student) makes payment for the entire course or curriculum to the institute or establishment issuing such certificate, diploma etc. and not to the commercial coaching or training center. 2.2.3 Certain doubts have been raised in case of commercial coaching and training. In this regard, the following is clarified,• Whether service tax is leviable on postal coaching: It is clarified that service tax is leviable on any coaching or training provided by an institution on commercial basis. Therefore, the coaching provided by postal means would also be covered under the service tax and the charges, including the postal charges collected for rendering this service would be subjected to service tax. • Whether service tax is leviable on institutes providing commercial coaching in addition to recognized degree courses: Some institutes like colleges, apart from imparting education for obtaining recognized degrees/diploma/certificates, also impart training for competitive examinations, various entrance tests etc. It is clarified that by definition, such institutes or establishments, which issue a certificate, diploma or degree recognized by law, are outside the purview of "commercial training or coaching institute". Thus, even if such institutes or establishments provide training for competitive examinations etc., such services rendered would be outside the scope of service tax. • Whether individuals going to houses to impart tuition/coaching would be chargeable to service tax: It is clarified that service tax is on institutions/establishments. Therefore, only those service providers are covered under the service tax who have some establishment for providing commercial coaching or training i.e. institutional coaching or training. Thus, individuals providing services at the premises of a service receiver would not be covered under service tax. However, if coaching or training center provides commercial coaching by sending individuals to the premises of service receivers, such services

would be chargeable to tax, as in this case, the individuals are rendering services on behalf of an institution. • Whether free summer training/ in house training provided by employers to their employees are covered under service tax net: It is clarified that in case employers provide any free training themselves, no service tax is chargeable. However if an employer hires an outside commercial coaching or training center for imparting some training to its employees, then the payment made by the said employer to such coaching center will be chargeable to service tax. 2.3 MAINTENANCE AND REPAIR SERVICES: 2.3.1 Maintenance contracts entered into before 1st July 2003: There are cases where maintenance contracts are entered into for a period of more than one year. Vide notification No.11/2003- Service Tax, dated 20th June 2003 for maintenance contracts entered into prior to 1st July, 2003, exemption has been provided to that part of the value of the service for which bill/invoices have been raised and the amount has actually been received prior to the 1st July, 2003. For such contracts, all subsequent payments or payments made against invoice issued subsequent to the 1st July 2003 will be chargeable to service tax. Similar will be situation for payments made for continuing services. 2.3.2 Certain doubts have been raised in case of maintenance and repair services as to whether service tax on maintenance and repair would be charged in cases where during the guarantee period, the services are provided to the buyer of the goods while the payments for the same are received from the supplier of the goods. In this regard it is clarified that irrespective of the fact that the receiver of the service is different from the person making payments for such services, the service tax is leviable on the services provided towards maintenance and repair. Therefore, for the services provided during the warranty period by the dealer or any other authorized person, service tax would also be leviable on any amount received by such dealer or such other authorized person from manufacturer of such goods. 2.4 FRANCHISE SERVICE: Franchise service is a service provided by franchisor to a franchisee. Section 65 of the Finance Act 1994, (sub section 47) defines franchise as a specific type of agreement. This agreement has various ingredients, which have been specified in the said definition. For removal of doubt it is clarified that unless all the ingredients mentioned at (i) to (iv) of the said sub section are satisfied, the agreement can not be called as franchise agreement. These ingredients are,(i) the franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified with franchisor, whether or not a trade mark, service mark, trade name or logo or any such symbol, as the case may be, is involved; (ii) the franchisor provides concepts of business operation to franchisee, including know how, method of operation, managerial expertise, marketing techniques or training and standards of quality control except passing on the ownership of all know how to franchisee; (iii) the franchisee is required to pay to the franchisor, directly or indirectly, a fee; and (iv) the franchisee is under an obligation not to engage in selling or providing similar goods or services or process, identified with any other person. For example, the mere fact that a principal manufacturer has allowed production of goods bearing his brand name by another person under ‘License Production Agreement`, does not make the agreement a Franchise Agreement. A franchise agreement also includes the franchisee being obliged to follow the concept of business operation, managerial expertise, market techniques etc. of the franchisor and is under an obligation not to engage in selling, producing or providing similar goods or services, identified with any other person. Therefore, in the absence of such ingredients, a mere licensed production cannot be called as a franchise agreement and accordingly the license fees paid for such license production cannot be charged to service tax. 2.5 TECHNICAL INSPECTION AND CERTIFICATION SERVICES: A doubt has been raised whether certification given in respect of immovable property should fall under the purview of ‘technical inspection and certification services`. In this regard it may be recalled that earlier, CBEC vide its order No. 1/1/2002, dated 26.02.2003, issued under Section 37B (of the Central excise Act as made applicable to service tax) had clarified that certification given under authority of any code or statute can not be considered as a consulting engineer service. However, the new service included in 2003 budget, namely ‘technical inspection and certification services` would cover certification of all types including that of immovable property. Therefore, it is clarified that such services become taxable from the notified date. 2.6 COMMISSIONING AND INSTALLATION SERVICES: Certain doubts have been raised in case of commercial coaching and training . In this regard, the following is clarified,• In case of commissioning and installation it has been pointed out that in case of turnkey project, the contract may be indivisible and no separate value could be assigned to commissioning or installation of goods. Doubts have also been raised as to what would be the value of taxable service. It is submitted that it has been provided in law that service tax is leviable on erection and commissioning charges only and not on the material and goods supplied. However, it is upto the service provider to show the break-up of commissioning or installation charges. In case service provider shows consolidated charges, service tax would be leviable on such consolidated amount. • A doubt has been raised as to whether charges for erection of plant are covered under the service tax or only commissioning and installation charges. It is clarified that the law specifically provides for taxation of commissioning and installation of plant, machinery or equipment. Thus all activities other than the commissioning and installation of the plant/machinery/equipment per se, will not be chargeable to service tax. 2.7 MANDAP KEEPER SERVICE: Religious places like parish hall, temples etc provide services as mandap keeper for hosting of social and religious functions. Though such services are liable to service tax under the mandap keeper services, vide notification No.14/2003-Service Tax, 20th June, 2003 services provided by the religious centers as mandap keeper in their precincts have been exempted from service tax. 2.8 CREDIT OF SERVICE TAX PAID ON TELEPHONES:

In regard to credit of service tax on telephone connection, queries have been raised as to whether service tax credit would be admissible on telephone sets installed only in the business premises. The answer is in the affirmative, and credit will be allowed only on telephone sets installed in the business premises. Mobile phones are not covered. 2.9 MISCELLANEOUS ISSUES: 2.9.1 In case of authorized service stations, maintenance or repair services, commissioning and installation services and photography services it has been provided in the law that the cost of goods and material shall not form part of the value to be subjected to service tax, if evidence (like sale invoice/bill) shows that these goods were sold. Such dispensation has, however, not been provided for other services like commercial coaching and training centers, telecom services. In this regard, a general exemption under Notification No. 12/2003-service Tax, dated 20th June, 2003 has been issued exempting that part of the value of all taxable services from service tax, which represents the cost of goods or material sold by the service provider to the receiver of such services during the course of provision of the taxable services. This exemption would be available only in cases where the sale of such goods is evidenced and the sale value is quantified and shown separately in the invoice. It is also clarified that in case of commercial training and coaching institutes, the exclusion shall apply only to the sale value of standard textbooks, which are priced. Any study material or written text provided by such institute as a part of service which does not satisfy the above criteria will be subjected to service tax. 2.9.2 In case of a non-resident service provider who does not have any office in India, the service receiver in India is liable to pay service tax. A doubt has been raised as to how such receiver would avail the service tax credit. As per the existing law, in such cases service receiver is required to take registration, to pay service tax and to comply with other procedural formalities. As there is no bar under service tax law on the service tax payer to take the same amount back as credit, the service receiver after having paid the service tax on behalf of the non-resident service provider, can take credit of the same on the basis of document/ bill/invoice under which he paid the service tax. 2.9.3 Though the new rate of service tax of 8% came into force from 14 th May, 2003 on existing 51 services, and would come into effect from 1st July, 2003 in case of new services and extensions of services, in certain cases service providers have reportedly collected service tax @ 8% on such services, even prior to these specified dates. In such cases, unless the amount is refunded back to service receiver, the service provider is required to deposit amount equal to such duty collected in excess of that is leviable, as per the provisions of the service tax law. 3. The contents of this circular may be given wide publicity so that no difficulty is faced by the trade as well as the departmental officers in their observance and implementation. Apart from issuance of trade notice, wide publicity in the form of press releases and advertisement may also be given. Meetings/Seminars/ Consultations with the trade may be conducted to clarify the new provisions and clarifications relating thereto. Any difficulty faced by the trade in observance, by the officers in implementation or other issues pertaining to the new levies may be brought to the notice of the undersigned. However, references for clarifications pertaining to existing services may be made to Member (Service Tax) or to CX-4 Section.

Income from business - Presentation Transcript Income from business/Profession By Prof. Augustin Amaladas M.Com., AICWA.,PGDFM., B.Ed. Charging Section[Sec.28] Profits and gains of any profession/profession Any compensation received related business Income received from members of similar profession Any benefit or perquisites from business /profession Export incentives from government Charging -Continue Any interest, salary, bonus, commission or remuneration received by a partner from firm. Sum received(compensation) from other company not to carry on any business for know how, patent, copy right, trademark. Profits and gains of managing agency Meaning of business Profit motive Business and rendering services to others Business cannot be carried on with oneself Export incentives Duty drawback import entitilement licences Are taxable u/s 28-Business/profession Business income not taxable u/s 28 1. Rental income in case of dealer in property taxable under the head income from house property[u/s22]. 2. Dividend on shares in case of a dealer in shares- taxed under income from other sources [u/s 56]. 3. winning from lotteries (lottery business) taxed u/s 56-income from other sources. Losses deductible from business income Loss due to natural calamity Loss due to non acceptance of goods Reduction in value of foreign currency which is meant for purchase of stock. Loss of cash/goods due to embezzelment, burglary, forfeiture of deposits. Loss of forgoing advance given by sugar industries to formers due to monsoon failure Loss not deductible from business Loss due to destruction of Capital asset. Loss on sale of investments held as investment. Loss of advance to set up a business but business could not be started. Depreciation in value of foreign currency for capital purpose Anticipated future losses. Loss of discontinued business

Loss from illegal business[T.A.Qureshiv.CIT(2006)SC] Computation of assessable profits/loss for tax Net profit as per P/L Account Add : Amount debited to P/L A/c in respect of the following Loss of earlier years Capital losses Personal expenses (such as drawings) Income tax, surtax, wealth tax, gift tax, estate duty[Direct taxes], tax penalty, penal interest, fine. Continues Add: Charity and donation Gifts and presents to others All reserves/provisions such as tax provision, Reserve for dividend, provision for bad debts except provision for depreciation All expenses related to other heads of income Continues Add : Expenses not deductible u/s 40 and 40A Expenses debited to P/L A/C not admissible u/s 30 to 40A Add : Amount not credited to P/L A/c Deemed income Deduct :Income credited to P/L A/c but not chargeable under other heads Continues Less : Salary income( income from salary(u/s 15) Rental incomeIncome from House property(u/s22) Capital gain(u/s 45) Dividend[ Income from other sources(56)] Direct taxes refund such as Income tax, Wealth tax, estate duty, surtax refunds Bad debts, excise duty recovered not allowed as expenditure preceding previous years Deduct: Expenses not debited to P/L A/c but allowed u/s 30 to 40A Depreciation u/s 32 Income chargeable under income from business/profession. Specific deductions expressly allowed u/s 30 to 37 1.Rent (Sec.30) Repairs(including painting of a house ) Land revenue, local taxes and municipal taxes Insurance against risk of damage or destruction Not allowed: a) arrears of rent b) share of profit instead of rent c. Repairs and insurance of machinery, plant and furniture(sec.31) Revenue repair-allowed Capital expenditure – not allowed Quantum of expenditure is not important Depreciation Allowances(sec.32) Conditions: Asset must be owned by the assessee(Registration is not important),full control over asset,right to retain the possession and defend are characteristics of ownership. Used or ready to use for business purpose Used in the previous year Both tangible and intangible assets Right on occupancy on Lease property is entitled for depreciation If hirer purchaser has right over asset and hire seller will loose all rights- Depreciation is allowed. Depreciation-Continues Insurance premium, repairs and other expenditure incurred on leased business asset are deductible in the hands of lessor. If any asset is fully controlled such as lease the capital expenditure incurred by lessee can provide depreciation[32(1)(ii). Lease property Registered ownership is not necessary Sec. 53A of the transfer of property Act. If the assessee can be the co-owner to claim depreciation Any capital expenditure incurred by the person who takes building can provide depreciation on capital expenditure. Rules of Accounting Standard (AS19) not applicable for depreciation as per IT Act. Hire purchase Conditions: Hire purchaser can provide depreciation if hire purchaser has uninterrupted right over the asset. The seller looses his right Who can provide depreciation? Hire purchaser. Residential quarters If used by the assessee’s employees –depreciation is allowed. 50% of rate of depreciation If an asset acquired during the previous year. Put into use or ready to use for less than 180 days. Exceptions:1. Put into use for less than 180 days but ready to use for more than 180 days –full rate of depreciation If asset purchased in the preceding year to current previous year but put into use for less than 180 days during the current previous year what is the rate of depreciation rate?

If an asset is not used at all-No depreciation not only for first year but also for subsequent period Full rate of depreciation. Can depreciation be provided on intangible assets such as know- how, patent rights, copy right, trade mark, licences, franchises etc. depreciation? Meaning of Building and Plant Building means: Super structure only. It does not include site. Plant : Includes ships, vehicle, books, technical know-how report, scientific apparatus and surgical equipment. It does not include tea bushes or livestock or building or furniture and fittings. If assessee does not claim depreciation whether is depreciation available? Method of depreciation Yes. Block asset method. What is block asset method? Similar nature of asset having the same rate of depreciation are clubbed together. 100% depreciation? 1. Building acquired on or after September 1, 2002 forming part of water supply project 2. Pollution control equipments 3. waste control equipment 4.wooden parts used in artificial silk manufacturing machine 5.cinimatograph films 6. Books Commercial vehicle If acquired and used before 31,March 2002. -Rate of depreciation is 50% . calculation of depreciation Block value in the beginning Add:- Purchase of asset of the same block Less:- Net sale value of the consideration received/receivable in cash /cheque/draft if any of the block of assets sold during the year Continuation Calculate depreciation of the balance amount. If it reaches to Zero value no more depreciation is allowed. If net sale consideration exceeds the block it amounts to short term capital gain. continues Once asset is depreciated the gain on sale of block never be a long term gain Index can not be used for the calculation of capital gain. If all assets of the assets sold out but block continues it amounts to short term capital loss. ###Intangible assets Depreciation is allowed at the rate of 25% Include: know- how, patent rights, copy rights, trade mark, licenses, franchises etc. Imported Cars Purchased between March 1, 1975 and March 31, 2001 for hire for tourist- no depreciation is allowed if used in India for business purposes other than for hire for tourist Used outside india for business-alowed For hire for tourist-allowed After 31 st March 2001- all purposes depreciation is allowed Change in the ownership in any part of the year due to amalgamation , absorption or demerger Calculate depreciation for the previous year as if no amalgamation/re-organization taken place Apportion between the companies on time basis. ###Computation of additional depreciation Manufacture or production of any article Purchased entirely new machinery Not used any part of the world Acquired and installed after March 31, 2005 Rate-20% If used less than 180 days-Half of the rate Excludes ships and aircrafts, used in the guest house, or office road transport vehicles Actual Cost Total cost-subsidy Includes: interest on money borrowed before the asset is put into use Bank charges Loading Unloading Actual cost-continues Modification before first put into use Training of staff to operate the machine Other related expenses required such as cold storage. Traveling expenses to acquire the asset Un-absorbed depreciation Deduct the depreciation of the previous year from income from business or profession Deduct it from other heads of income except salary If not able to absorb-carry over to subsequent assessment year (s) – No time limit. Subsequent assessment years

Order of priority to set off: 1. current depreciation 2.Brought forward business losses 3. Un-absorbed depreciation Note: Continuity of business is not relevant. The same assessee only can carry forward Depreciation on Straight Line basis/WDV Applicable to Power units(generating and distribution of power) Assets acquired after 31 st march 1997. Terminal depreciation If straight line depreciation method followed on power generating units sold after the use of such asset more than one previous year Terminal depreciation=WDV> Net Sale consideration Capital gain=Net sale>WDV Tea, coffee and rubber development account[Sec.33AB] Deposit with NABARD or Deposit account of tea, coffee or rubber Board With in 6 months from the end of the previous year or before the last date of filing of returns whichever earlier Exemption: Amount deposited or 40% of profit whichever is less Can amount be withdrawn? withdrawal Only for the purpose stated If unutilised within the previous year it is treated as income If business closed or dissolved-treated as taxable profit If death of the taxpayer/partition of HUF/liquidation of company will not be treated as income Purpose: installed in plant and machinery in low priority sector or entitled to get 100% depreciation. Maximum 8 years Site restoration fund[sec.33ABA] Production of Petroleum /Natural gas in India Deposit with SBI/account opened as per petrolem and Natural Gas Commission In a scheme specified Before the end of the previous year Amount withdrawn should be used for low priority sector/100% depreciated and utiled within 8 years at the end of previous year. ###Scientific research[Sec.35] In house research All Revenue expenditure and Capital expenditure related to one’s business during the current previous year or even 3*** preceding previous years allowed [Except Land] Even asset is not put into use –it is allowed. No depreciation is allowed on such capital asset If such asset is sold what could be the consequences? If scientific asset sold? If not used for any other purpose: ***Sale or deduction already allowed whichever is less taxed as business profit. Capital gain=Sale-Cost (index if required) Contribution to National laboratory Including University, IIT Weighted deduction= 1.25 times of contribution can be treated as Expenditure. *** Even approval is withdrawn after the payment to such institution the assesssee who contributed can enjoy the benefit Expenditure on Patent rights and copy rights[35A] Capital Expenditure incurred before 1 st April 1998 14 instalments After 1 st April 1998- Depreciation can be claimed-25% Revenue expenditure- Fully allowed expenditure in the year such expenditure incurred. Technical know how Only depreciation 25% allowed Amortisation of telecom license fees[35ABB] Conditions Capital Expenditure Acquiring any right to operate telecommunication services Incurred before or after commencement of Business Mainly incurred to obtain license. If conditions fulfilled claim can be done u/s 35ABB otherwise u/s 37(1) as business expenditure. Payment to associations and institution for rural development program Institutions approved before 1 st March 1983 Deduction up to the amount paid Amortisation of preliminary expenses Indian Company or resident non corporate assessee Foreign company excluded Legal charges on MOA, AOA,printing of MOA, AOA,Registration fees,expenses connected to issue of shares or debentures Is there any limit?

Limit of preliminary expenses Actual cost= costs incurred initially and additional costs after commencement Of business 5% of the cost of the project 5% of cost of project or 5% of capital employed Whichever is More(dil monge more) Non-Corporate assessee Corporate assessee Preliminary Exp. Continue The value on the last day of the previous year in which the business of the assessee commences. Deduction: 1/5 of the qualifying expenditure Expenses on issue of shares/Debentures New company even Old industrial company issue shares - u/s 35 D Old company-- u/s 37(1) except issue of shares) Old industrial company issue shares-35D Non industrial company – All expenses related to bonus issue, issue of debentures or raising of long term or short term loans Note : old non industrial company- Expenditure related to issue of shares can not be claimed Amortisation of expenditure incurred for amalgamation[35DD] Indian company Deductions in five successive installments Amortisation of expenditure under voluntary retirement scheme[35DDA] Any assessee Deduction 1/5 every year Voluntary retirement scheme need not be accordance with guidelines prescribed under section 10(10C) Amartisation of expenditure on development of certain minerals[35E] Indian companies and Resident assessee I/10 every year allowed Insurance premium to protect the asset or employees[36(1)(i)] Allowed Bonus to employees[36(1)(ii)] Interest on borrowed capital[36 (1)(iii) Interest on own capital is not allowed. Interest paid by a firm to partner is deductible- 12% per annum Simple interest Interest paid to wife and daughter- allowed Interest before the asset is put into use to be capitalised Interest paid outside India without deducting TDS Not allowed Discount on Zeeero coupon Discount Bonds[36(1)(iiia)] Issued after June 1, 2005 Minimum 10 years and Maximum 20 years Deduction on pro rata basis. ***Unpaid liabilities Includes: Local taxes, duty cess or fee under any law Sum payable to employees such PF, Gratuity, superannuation fund to employees, BONUS, OR COMMISSION Interest on loan borrowed from public financial institution such as ICICI,IFCI, IDBI,LIC AND UTI ONLY DEDUCTION ALLOWED ON PAYMENT BASIS OR ACCRUAL BASIS? Payment/ Accrual????? No payment- Not allowed If deposited EVEN before the last date of filing of returns with Proof for payment- fully allowed(page 336) ****Employees ’ contribution towards staff welfare scheme such as PF[36(1)(va)] Amount received by employerIncluded with the assessee’s Income If Paid to the employees’s account??? If paid !!!!! Due date #### as per the PF rules or Gratuity rules Usually with in a month of deduction from employees. *****not as per IT rules Written off of allowance for animals [36(1)(vi)] If died /useless Used as capital asset Allowed loss = Original cost- Carcasses or ( sale of animals ) No depreciation is allowed any time on animals Bad debts [36(1)(vii)] !!! If actual- allowed Provision –Never allowed If recovered[41(4)]-----If earlier allowed it is taxable If earlier denied - not taxable Provision for Bad and doubtful debts to rural branches of scheduled and non scheduled commercial banks[36(1)(vii)] bank and Institution bank Non scheduled Scheduled Financial Foreign 7.5% of income 5% 5% 10% of advances --- --made by rural branchs Transfer to SPECIAL RESERVE [36(1)(viii)]

Long term (5 years or more) financial corporation/public company/government company Finance for industry/agriculture/infrastructure facilities in India. Deduction: Whichever is less 1. amount transferred to such account or 2. 40% of profit from business activities before such deductions 3. 200% of paid up capital and reserve on the last day of PY(- )amount in special reserve account in the beginning of the PY Family planning expenditure [36(1)(ix)] For Company assessee Revenue expenditure- Fully allowed Capital Expenditure - 1/5 th every year Non-corporate assessee can claim u/s 32(Depreciation on capital expenditure) and 37(1)(Revenue expenditure) Advertisement Expenditure[37(2B)] Advertisement In publication of political party ------ Not allowed All advertisements -- Allowed Expenses incurred by commission agent from insurance UTI agents etc.If commission less than 60,000 20,000 50% of commission 15% OF THE COMMISSION 33 1/3% No deduction 50% LIC –first year Renewal commission First & renewal Commission Bonus commission UTI/agents of specified securities, mutual funds authorised agent 3 2 1 Max. deduction Adhoc deduction commission Contribution towards Exchange risk Administration fund [36(1)(x)] By Public financial institution Deductible upto the assessment year 2007-08 Benefits to public financial institutions General deductions[37(1)] It should not be a capital expenditure or Not personal Not prohibited by law such as fine, penalty Not be an illegal expenditure Can we see some of the expenditures allowed as per various case laws? Expenses allowed *Litigation expenses to protect the trade or business /asset/or to retain title of asset *Legal expenses to receive loan *Litigation expenses in restoring trade mark ***Legal expenses to alter the AOA in conformity with the changes brought about in the companies ACT ****Damages paid to workers/fulfil the contract ***Damages for breach of contract Expenses allowed **Contribution to the union formed to oppose the nationalisation of assessee’s business **Expenses incurred during festival ***Premium paid for loss of profit *Professional tax paid All maintenance expenditure **Expenses incurred to register trade marks *****Entertainment expenses **Periodical payment for the use of goodwill Expenses allowed-case laws ###Estimated probable liability for free maintenance CIT vs Modi Olovetti ltd.(2004) ***Expenditure to car even it is huge[CIT vs Mangalchand premchand& co.[2004] **Repairs to maintain building taken on lease [Sumitomo Corpn. India (p) ltd. Expenditure on civil work on leased asset [Hero Honda motors vs CIT ***Interest on delayed payment of Provident fund[CIT vs Ishwari Khetan Sugar Mills (P0 ltd.(2004) Important notes & controversial issues Expenditure to issue of shares fees paid to Registrar to increase the authorised capital disallowed[Brook Bond India ltd Vs CIT(SC) Retrenchment compensation payable at the time of partial closure of business Is deductible. But at the time of closure of industry is not deductible[CIT vs MGF India(2004) Expenses allowed ****Expenditure to issue of debentures bonus shares allowed Controversial Continues ***Foreign study expenses incurred by the company even though the employee is a director’s son-allowed [J.B Advani& co Vs CIT](2005) Controversial Continues Medical expenses of wife employee of cine actor-Allowed [Ajay Singh Deol Vs CIT] Payment on account of membership fees for health club and also paid membership fees for an another club-Allowed [Sterlite Industries (India) Vs CIT(2006) Controversial- Continues ###Provision made for contribution towards Provident Fund maintained by Government of Tamilnadu sent on deputation to the assessee corporation-allowed[ CIT Vs Kattabomman Transport Corporation Ltd.(2004) Controversial Continues ***Interest on arrears of tax , sales tax compensatory in nature and not penal – allowed(Lachmandas Vs CIT(SC) (2002) ***Interest paid for late payment of tax is disallowed. Even Income-tax itself disallowed. Disallowed Expenditure *****Interest paid on borrowed funds to pay Income tax is disallowed

Interest paid on installment of the price of property *****Expenditure to raise capital ***Expenditure on shifting of registered office Penalty/fine /interest on penalty *#*#*# Disallowed Important question to be asked!!! ****Protecting Business or protecting the title to capital asset. Capital Expenditure or revenue expenditure Expressly disallowed expenditures Interest, Royalty, fees for technical services payable outside India ***TAX TO BE DEDUCTED AND PAID WITHIN 7 DAYS FROM THE LAST DAY OF THE MONTH IN WHICH TAX WAS DEDUCTED OR Expressly disallowed expenditures AMOUNT PAID TO GOVERNMENT IN THE FINANCIAL YEAR IF NOT PAID WITHIN 7 DAYS FROM THE LAST DAY OF THE MONTH. Anything paid after the financial year and after the expiry of 7 days FROM THE LAST DAY OF THE MONTH -deductible only in the year of payment. Fringe benefit tax Fringe benefit tax, Income tax, wealth tax, securities transaction tax- Not Taxable Salary payable outside India without TDS Outside India both resident and non-resident In India to NON-REDIDENT NOT ALLOWED Payment from provident fund If TDS not done- Not allowed Tax on perquisites paid by the employer Tax paid by employer- Not taxable to employees Perquisites paid- Not deductible to employer (Non monetary) See illustration- para 82.1.8- page 328 Payment to relatives[ Sec. 40A(2)] Excess or unreasonable - disallowed Relative: husband, wife, brother or sister or lineal ascendant or descendant of that individual. Substantial interest:- at least 20% of equity or 20% profits of a concern at any time during the year Expenditure exceeding Rs. 20,000 Should be paid account payee crossed cheque or account payee demand draft. If not - 20% of such payment is disallowed. Note: on the same day any number of cheques less than 20,000 each can be given Partly cash, partly cheque without account payee crossed cheque without exceeding 20,000 each. Payment to unapproved gratuity by employer Not deductible expenditure. Recovery of earlier deductions If recovered in the subsequent assessment years it is taxable even there is no business and taxed in the hands of recepient. Undisclosed income Cash credit[sec.68] Undisclosed investment[sec.69] Unexplained money [sec. 69A] Amount of investments not fully disclosed [sec.69B] Unexplained expenditure [sec.69C] Amount borrowed or repaid on hundi[sec.69D] They are deemed income of the current previous year. Maintenance of books compulsory[Sec.44AA] Legal medical, engineering, architectural, accountancy, Film artist technical consultancy, or interior decoration and other notified profession [Specified professional] If gross receipts exceed 1,50,000 in any of the three years preceding the previous year. Non-specified professional- Income exceed Rs. 1,20,000 and total gross receipts exceed 10,00,000 What are those books maintained? Specified Books to be maintained Cash book A Journal on mercantile basis Ledger Carbon copies of machine numbered bills exceeding Rs. 25 issued by the person Original bills if exceed Rs. 50. If bills are not issued payment vouchers signed by the person Medical practitioner Additional books required: Daily cash register showing date, patient’s name, nature of professional services rendered, fees received and date of receipt Stock register for medicines and other consumable accessories . Audit of Accounts[sec.44AB] if crossed limit Business-Gross receipts /sales exceed 40 lakhs Profession- gross receipts exceed 10 lakhs Audit compulsory with out any limit of income/receipt Person engaged in: 1. civil construction[44AD]- 8% of gross receipts

2.Business of plying, leasing or hiring trucks[44AE]- Heavy vehicles Rs. 3500 pm (owned months), other vehicles- 3150 pm (not owned more than 10 vehicles any time during the previous year.- No expenditure is deductible . Retail traders[44AF]- 5% of turnover is considered as income Important points to solve problems Bonus-before last date of filing Depreciation- permitted as per income tax Direct taxes-disallowed Indirect taxes-allowed if paid before due date of filing Capital expenditure-disallowed Bad debts recovered-if allowed earlier taxable Income from other heads such as salary, house property etc-if included in the P/L /A/c deduct. Points to solve problems Outstanding statutory liability-before due date to be paid statutory penalty-disallowed Contractual penalty-allowed Personal expenditure-disallowed Points to solve problems Entertainment expenditure-fully allowed Maintenance of guest house-fully allowed Revenue advertisement including gift to customers-fully allowed. Points to solve problems Capital expenditure on advertisement-depreciation is allowed. Amount paid for expenses beyond 20,000 without crossed a/c payee cheque or draft -20% disallowed Any expenditure incurred (traveling) out side india –allowed to the extent of RBI’s permission Points to solve problems paid on borrowing-Not allowed Expenditure to audit-allowed Expenditure to prepare accounts for IT –allowed interest Points to solve problems Interest on borrowing to pay direct tax such as Income tax-disallowed Copy right , technical know how, patent right- amount paid disallowed but depreciation 25% only allowed. Employee’s contribution to PF- treated as income If such employee’s contribution is paid before due date as per the PF act- allowed. Points to solve problems Capital expenditure on travelling-disallowed Traveling expenditure to buy stock-allowed Insurance to asset or employees-fully allowed expenditure Profit on sale of capital asset which is included in the P/L /a/c- disallowed Points to solve problems Rent received from outsider other than employee- credited to P/L A/c-disallowed income-subtract from net profit-Income from House property. Any payment to workers/Government-Before the last date of filing returns is allowed Points to solve problems All reserves/provision except depreciation provision-disallowed Interest on own capital-disallowed Direct taxes refund like It refund shown in P/L A/C –disallowed income= subtract from profit Revenue repair to building , furniture even leasehold –allowed expenditure Points to solve problems Capital expenditure on family planning- 1/5 is allowed Loss of cash, goods-allowed. Donation and charity-disallowed Fringe benefit tax-disalowed Expenditure on issue of shares-disallowed ;where as expenditure on issue of debentures, arrangement of loan (borrowed capital)- allowed Points to solve problems Income from other heads-inadmissible income Advance payment of tax, provision for tax, income tax refund-disalloed Life insurance premium of owner paid from business-disallowed Scientific Research (in house)-fully allowed including capital expenditure Family planning revenue expenditure-allowed Points to solve problems Unapproved statutory funds-disallowed Closing stock and opening stock to be valued in the same manner Profit and loss account 10,00,000 Gross profit Interest on bonds Dividend received Rent Rent paid in advance Profit on sale of investment discount Salaries Rent and rates Office expenses Stock destroyed Depreciation Discount Advertisement Interest on loan Scientific research expenses Bad debts RBD Insurance on building Insurance stock Income tax Amount Rupees particulars Amount Rupees particulars Closing stock is 10% less than the actual value Opening stock was over valued by 8% Advance payment of tax provision for tax

income tax refund Loss of cash, goods Capital expenditure on family planning Loss of cash, goods Donation and charity Fringe benefit tax Expenditure on issue of shares expenditure on issue of debentures , arrangement of loan on borrowed capital Bonus paid on 2 nd september Copy right technical know how patent rights Cash Amount paid for expenses 25000 Bad debts written off recovered (earlier disallowed) statutory penalty Contractual penalty Personal expenditure Interest paid on borrowed funds to pay Income tax Interest paid on installment of the price of property Expenditure to raise capital Expenditure on shifting of registered office

Computation of Gross Total Income Contents 1

Salaries

2

Income from house property

3

Profits and gains of business or profession

4

Capital Gains

5

Income from other sources

6

Set off of Losses

7

Carry Forward of Losses

Taxable income is computed under the respective heads (para 1.2.4) after allowing from gross receipts admissible deductions for cost and expenses. The net income under each of these heads is then aggregated to arrive at the 'Gross total Income'. Computation of income under individual heads is explained in paragraphs following. Salaries 4.2 Income from salaries is computed in accordance with the provisions of section 15 to 17 of the Act. 'Salary' means all remuneration paid or due under the contract of employment. It includes wages, annuity, pension, gratuity, fees, commission, perquisites, profits in lieu of or in addition to any salary or wages, any advance of salary, leave salary encashment or any other payment by the employer for services rendered. The annual accretion to the balance at the credit of an employee participating in a recognised provident fund in excess of the prescribed limit is includible in the salary income of the employee. 'Perquisites' mean the benefits or amenities provided in kind by the employer free of cost or at a concessional rate. The value of these is regarded as part of salary. Rule 3 of the Income Tax Rules lays down the methods for determining the value of certain perquisites. For others the general rule of valuing the perquisites in the hands of the employee is to take the cost to the employer in providing the benefit or amenity. It has been clarified that securities allotted to an employee free of cost or at concessional rate under ESOP or as sweat equity shares will not be taxable as perquisite. 4.2.1 In order to be taxable under the head 'Salaries', it is necessary that there is a relationship of employer and employee between the payer and the receiver. It is for this reason remuneration received as a partner is not taxable as 'salary'. 4.2.2 In computing the salary income for the assessment year 1999-2000, a standard deduction is allowed as under:i.

Where salary income is upto Rs. one lakh - 33-1/3% or Rs. 25,000/- whichever is less.

ii. iii.

Where salary income exceeds Rs. one lakh but does not exceed rupees five lakh Rs. 20,000/-. Where salary income exceeds rupees five lakh - NIL

Deduction for profession or employment tax levied by State Government is also allowed. Income from house property 4.3 Income from house property is computed in the hands of the owner in accordance with the provisions of sections 22 to 27 of the Act. It is determined with reference to its 'annual value', i.e. the sum for which the property might reasonably be let from year to year. However, where any property is tenanted and the annual rent received or receivable by the owner is in excess of the sum for which the property might reasonably be expected to be let from year to year, the actual annual rent received or receivable is taken as the annual value of the property. 4.3.1 From the annual value of a house property in the occupation of a tenant, taxes levied by any local authority in respect of the property to the extent such taxes are borne by the owner are deductible on actual payment basis to arrive at the 'net annual value'. 4.3.2 Where the property consists of a house or a part of a house which is in the occupation of the owner for his own residence, its annual value is taken as Nil. But if such a property is let out during any part of the previous year, its annual value is taken proportionately. Further, where the owner has only one resedential house and the house cannot be actually occupied by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him, its annual value is taken to be nil provided the house is not actually let out and no other benefit is derived by the owner from it. 4.3.3 From the net annual value, determined as above deductions on account of annual repairs and collection expenses (1/4th of the net annual value irrespective of actual expenditure), insurance charges in respect of property, any annual charge, interest paid on any money borrowed for the building, ground rent, land revenue, unrealised rent are allowed. All these deductions are not allowed in respect of the house property in the occupation of the owner for his own residence, the annual value of which is taken at Nil. In such a case deduction is allowed only for interest and that too upto Rs. 1,00,000 only provided the house was constructed or acquired after 1.4.1999 but before 1.4.2003. 4.3.4 Under the circumstances mentioned in Sec. 27 of the I.T. Act, a person can be deemed to be the owner of the house property and in such a case the income .from that property is taxable in the hands of that person. 4.3.5 Where the net result of computation of income from house property is loss and the assessee has income assessable under any other head of income, he is entitled to have such loss set off against income under other heads. Any loss remaining unadjusted can be carried forward to the following assessment year for setoff against income from house property in that years and in succeeding seven years. Profits and gains of business or profession 4.4 Income from business or profession is computed in accordance with the provisions of sections 28 to 44D of the Act. The expression 'business or profession' includes any trade commerce or manufacture or vocation. Apart from income from any of these activities the income chargeable under this head includes the following receipts as well:i.

Compensation received for the termination or for modifications in terms and conditions of any managing agency agreement. ii. Income of trade, professional and similar associations from specific services performed for its members. iii. Value of any benefit or perquisite arising from any business or profession. iv. Profit on sale of a replenishment license, cash assistance or refund of duty drawback granted to the exporters. v. Any interest, salary, bonus, commission or remuneration due to or received by a partner of a firm from such firm. vi. Any sum received under a keyman insurance policy including bonus on such policy. 4.4.1 Primarily the business or professional income is computed as per the accepted business and accounting norms and in accordance with the method of accounting regularly employed by the tax payer. Thus, whatever constitutes a legitimate outgoing of revenue nature of a business is allowed as a deduction in computing the business income. However, certain deductions are allowed in the Act as per the specific provisions made with

regard to those deductions and certain deductions, though business related, are not allowed because of specific bar on their allowance under the Act. 4.4.2 Some of the specific provisions made in law for permissible deductions in computation of business or professional income relate to the following items of expenditure and outgoings:i.

rent, rates, taxes, repairs and insurance of premises used for the purpose of business or profession; ii. repairs and insurance of machinery, plant and furniture used for the purpose of business of profession; iii. depreciation of tangible assets viz., building, machinery, plant and furniture and intangible assets viz., know how, patents copy rights, trade marks, licences, franchises or any other business or commercial rights of similar nature owned by the tax payer and used for the purpose of business or profession; iv. Expenditure in respect of scientific research:a. On in-house research related to the business of the assessee. b. Capital expenditure (except expenditure on land) in relation to the research related to the business. c. Contribution to an approved University, college, association or institution for scientific research including research in social science or statistical research. d. For payment to a National Laboratory or a University or an Indian Institute of Technology for scientific research under an approved programme, a weighted deduction equal to one and onefourth time the sum paid is allowable. v. Expenditure of deffered revenue nature which are amortised over a number of years. These are:(a) On acquisition of patent rights and 14 years (upto A.Y. 1998-99) copy rights (Sec. 35A) (b) On acquisition (Sec.35AB)

of

know-how

6 years (upto A.Y. 1998-99)

(c) Preliminary expenses on setting up 5 years of business (Sec. 35D) (d) On prospecting for or extraction or production of mineral deposits 10 years (Sec.35E) (e) Expenditure in the nature of capital expenditure on obtaining licence to Years during which the licence operate telecommunication services remains in force. (Sec. 35ABB) vi. premium in respect of insurance against risk of damage or destruction of stock and stores used for business or profession; vii. premium in respect of health insurance of the employees; viii. bonus and commission to employees; ix. interest on capital borrowed for the business or profession; x. contribution to a recognised provident fund, an approved superannuation fund or an approved gratuity fund; xi. bad debts; and xii. payments to notified Rural Development Fund or to National Urban Poverty Eradication Fund or to approved organisation/institutions enaged in activities of conservation of natural resources or afforestation or for

carrying out eligible projects or schemes approved by the National Committee. 4.4.3 In addition, there is a residuary provision under which the tax payer can claim deduction in respect of any expenditure incurred wholly and exclusively for the purpose of the business or profession. This omnibus clause is not available for claiming any expenditure for which a specific provision is made or for expenses of capital or personal nature or expenditure for any purpose which is an offence or which is prohibited by law.

Top

4.4.4 Expenses, even though business-related, which are not allowed as deduction are i.

expenditure on advertisement in any souvenir etc. of a political party; ii. any interest, salary, royalty, fees for technical services or other sum payable outside India from which due tax has not been deducted at source; iii. any tax calculated on the basis of profits or gains of the business or profession e.g. income tax; iv. Wealth tax. Top

4.4.5 Apart from these; the tax authorities may disallow, or restrict the deduction to a reasonable level, where the payments are made to any close relative or a business associate. Claims are also to be disallowed to the extent of 20% where payments in excess of Rs. 10,000/- are not made by a crossed cheque or a crossed bank draft. 4.4.6 The above stated principles of computation of business income apply uniformly to all forms of business activities. However, there exist certain special provisions under the Act which deal exclusively with taxation of business income from certain specific activities. These provisions make departure from the normal manner of computing income as explained above and prescribe for working out the taxable income on presumptive basis as per the norms laid down. These are:(i) Business of civil construction or supply of Profit as declared in the return or the sum labour for civil construction where the total equal to 8% of the gross receipts of the receipts do not exceed 40 lakh rupees previous year, whichever is higher. (Sec.44AD) (ii) Business of plying, hiring or leasing goods Profit as declared in the return of income or carriage, where the assessee does not own the sum calculated at Rs. 2,000/- per month more than ten goods carriages (Sec. 44AE) or part of a month for heavy goods vehicle and Rs. 1,800/- per month or part of a month for other vehicles, whichever is higher. (iii) Retail trade in goods or merchandise Profit as declared in the return of income or where the total turnover of the previous year the sum equal to 5% of total turnover of the does not exceed forty lakh rupees. previous year, whichever is higher. Further there are special provisions for computing presumptive income in the case of non-residents engaged in the business of shipping, exploration, etc. of mineral oils, operation of aircraft and civil construction etc. in certain turnkey power projects. Such provisions also exist for taxation of income from certain dividends, interest and units derived by a non-resident or a foreign company and from royalty or fees for technical services derived by a foreign company. A detailed discussion about such provisions is made in Chapters VIII and X. 4.4.7 It is obligatory on persons engaged in certain specific professions such as legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, authorised representatives, film artists etc., to maintain books of accounts in a manner which may enable the assessing officer to compute their taxable income. The obligation to maintain such books of accounts is also on all other professions and business if the income in any of the preceding three years exceeded rupees 1,20,000 or the turnover/receipts in any of the preceding three years exceeded rupees ten lakhs. For the business or profession which is newly set up the obligation arises if the income or turnover/receipts is likely to exceed these amounts in the previous year. Persons engaged in activities mentioned in para 4.4.6 are exempted from such obligation.

4.4.8 Further, every person carrying on business or profession in India must have his accounts audited by a chartered accountant if his turnover exceeds Rs. 40 lakhs (Rs. 10 lakhs for professional receipt). A copy of the audited accounts and auditor's report are required to be furnished by the due date of filing the retrun of income. Certain other particulars are required to be filed alongwith the return of Income. The requirement to get the accounts audited does not apply to persons enaged in activities mentioned in para 4.4.6. 4.4.9 In case of a partnership firm deducation for certain payments made to its partners like interest and remuneration is subject to ceiling laid down in sec. 40 (b) introduced by Finance Act 1992. Capital Gains 4.5 Sections 45 to 55A deal with the provisions relating to computation of income from capital gains. Gains arising from the transfer of a capital asset are either short-term or long-term depending upon the period for which the assets giving rise to capital gains were held by the tax payer. A gain is short term if the asset was held for a period upto 36 months. In the case of share of a company, listed security, unit of Unit Trust of India or of any other specified mutual fund, this period is 12 months. All other gains i.e. those arising from assets held for more than this period are called 'Long-term capital gains'. 4.5.1 Capital gain is computed by deducting from the full value of transfer consideration the following:a. the cost of acquisition (or the written down value) of and cost of improvement in the asset; b. the amount of expenditure incurred in connection with such transfer. The resultant amount in case of short term capital gains is taxable in full at the normal rate of taxation applicable to the tax payer. 4.5.2 In case of the following self-generated assets where there is no cost incurred by the assessee, the law provides for the cost of acquisition to be taken as 'NIL' :i.

Goodwill or a right to manufacture produce or process any article or thing. ii. Tenancy rights iii. Stage carriage permit iv. Loom hours 4.5.3 In case of slump sale of an undertaking or a division thereof, its net worth is to be taken as cost of acquisition. This cost of acquisition is not to be indexed as stated in para 4.5.4. 4.5.4 There are special provisions for computation of long term capital gains. In such cases, the actual cost of acquisition and the cost of improvement of the asset is adjusted to take account of inflation in terms of the Cost Inflation Index which is notified by the Central Government every year. For those assets which are acquired prior to 1st April, 1981, the actual cost can be taken to be its fair market value as on 1st April, 1981 which is than adjusted for inflation in the same manner. The notified cost inflation index is as under:S.No. Financial Year Cost Index 1.

1981-82

100

2.

1982-83

109

3.

1983-84

116

4.

1984-85

125

5.

1985-86

133

6.

1986-87

140

7.

3987-88

150

8. 9.

1988-89 1989-90

161 172

10. 11.

1990-91 1991-92

182 199

12.

1992-93

223

13.

1993-94

244

14.

1994-95

259

15. 16.

1995-96 1996-97

281 305

17.

1997-98

331

18. 1998-99 351 19. 1999-2000 389 4.5.5 Long term capital gains computed after taking into consideration the indexed cost of acquisition and/or cost of Irnprovement is taxable for and from the assessment year 1988-89 at the flat rate of 20% irrespective of the residential status of the assessee. Exceptions are made in the case of certain categories of non-residents and NRIs (Refer para 7.3.4 and 11.3). In respect of gains arising from transfer of listed securities or unit tax so computed @.20% will be limited to 10% of capital gain worked out without indexation benefit. No indexation benefit is available on bonds and debentures as also in respect of Global Depository Receipts purchased by a resident employee under ESOP in foreign currency. 4.5.6 In case of non-residents, protection against loss arising from fluctuation in rupee value is provided in computation of capital gains if the share or debenture of an Indian company was acquired by utilising foreign currency. This is done to ensure that the amount of capital gains chargeable to tax is not influenced by the exchange rate fluctuation and represents only the accretion in value. The manner of granting such protection is mentioned in para 7.3.1 of Chapter VII. 4.5.7 Transfer of a capital asset in a scheme of amalgamation or demerger is not regarded as a transfer for the purpose of capital gains when the amalgamated or the resulting company is an Indian company. Further, transfer of a capital asset being shares in Indian companies from one foreign company to another, in a scheme of amalgamation or demerger would not be regarded as a transfer if certain conditions are satisfied (para 7.3.2). Exemption from tax is also provided, subject to fulfillment of certain condition, when assets are transferred as a result of succession of a sole proprietory concern or a firm by a company. 4.5.8 In case the capital gain arising from transfer of an asset is used for acquiring similar assets within a specified period, the whole or the proportionate amount of capital gain is not included in the income depending upon whether the whole of the capital gains is so used or only part of it is used for acquiring a new asset. Such cases are gains from residential house, agricultural land and from transfer of industrial undertaking (For details sections 54, 54B and 54G may be referred to). Gains from any long term asset if used for purchase or construction of residential house where the person has only one residential house is also exempt (Sec. 54F). Similarly gain arising from transfer of any long-term capital asset is exempt-wholly or proportionately as the case may be-if the net consideration in respect of such transfer is wholly or partly invested, within a period of six months, in any of the bonds, debentures, shares of a public company or units of a mutual fund specified by the Board for the purpose of Section 54EA and notified in the official gazette. The assessee has the option to invest only the amount of capital gain in assets specified by the Board for the purpose of Section 54EB in which case the gain will be wholly or proportionately exempt depending upon whether whole or part of the gain is so invested. The new assets cannot be transferred or converted into money within three years (if the net consideration was invested) and within seven years (if the capital gain only was invested). In the event of such transfer or conversion, the gains exempted on investment are brought to tax in the year of transfer or conversion of new assets and Rural Development or by the National Highways Authority of Indian which are redeemable after five years. However gains arising from transfers after 31.3.2000 will be required to be invested only in bonds issues by National Bank for Agriculture. 4.5.9 Special provisions exist for taxation of capital gains arising to offshore funds from transfer of units purchased in foreign currency, to non-residents from transfer of bonds or shares purchased in foreign currency and to Foreign Institutional Investors from transfer of listed securities purchased in foreign currency. These provisions are explained at 7.3.4 in Chapter VII. Income from other sources 4.6 Sections 56 to 59 deal with the provisions for computation of income under the head 'income from other sources'. This is a residuary head covering all incomes which do not specifically fall .under any of the heads mentioned earliers. Some of the types of income which are assessable under this head are mentioned belows :i. ii.

Dividends or income from units of mutual fund. Interest including 'interest on securities' if it is not taxable under the head 'Profits and gains of business or profession'. iii. Income such as a. Ground rent or rent received or sub-letting a property.

b.

iv.

Winning from lotteries, cross-word puzzles, races including horse races, card games or from gambling or betting etc. c. Income from hiring of machinery, plant or furniture unless such a hiring is the business of the taxpayer. Family pension.

4.6.1 In computing the taxable income under this head, deduction is allowable for expenditure (other than capital expenditure) which is incurred by the tax payer wholly and exclusively for the purpose of earning such income. Besides, in assessing dividend income, any remuneration or commission paid for realising such income is allowed as deduction. In assessing income from letting the machinery, plant or furniture on hire, the depreciation on the value of such assets calculated in the same manner as in respect of assets used in a business or profession is allowable as a deduction. No deduction is, however, allowed in respect of— i. ii.

any personal expenditure of the tax payer; any salaries or interest payable outside India from which tax is deductible at source under the Act but has not been deducted.

4.6.2 Further, no deduction in respect of any expenditure or allowance is made in computing income from winnings referred in (iii) (b) of para 4.6 above. Such income is taxable at a flat rate of 40 per cent under the provisions of Section 115BB. 4.6.3 A standard deduction equal to 33-1/3% of the pension amount or Rs. 15,000/- whichever is less is allowed in computing income from family pension. Set off of Losses 4.7 In case of computation of income under any of the heads of income results in a loss figure, such loss can be set off against income under any other head (including capital gains) in the same year. This, however, does not apply to losses from speculative transactions, losses from owning and maintaining race horses or to losses under the head 'Capital Gains'. Losses of these excluded categories can be set off only against income, if any, from activities in the same category in that year. Carry Forward of Losses 4.8 Losses under the head 'Profits and Gains of business or profession' except those sustained from speculative activities which cannot be set off against income under any other head within the same year can be carried forward to the succeeding eight years and set off only against income under the same head in those years. In case of — i. ii. iii.

amalgamation of company owning industrial undertaking or a ship with another company; a demerger of a company; a reorganisation of business resulting in succession of a firm or a proprietory concern by a company;

the accumulated losses or unabsorbed depreciation of the amalgamating company, demerged company or the predecessor concern will, subject to fulfillment of certain conditions (sec. 72A), be treated as losses or depreciation of amalgamated company, resulting company or the successor concern and will be allowed to be set off and carried forward as their own loss or depreciation Gains which would not be set off against income of respective nature in any year can be carried forward for eight succeeding years for set off against income of similar nature, if any, in those years. Losses in the activity of owning and maintaining race horses can be carried forward for set off against profits of similar activities in succeeding four years only. 4.8.2 Losses under the head income from house property which could not be set off against income under any other head can be carried forward for eight succeeding years for set off against income under this head in those years. 4.8.3 If 51% or more of the voting power changes hands in an unlisted company, the company will not be able to carry forward losses incurred before such change.

How to Hire the Right Accountant for Your Business A business's bookkeeper or accountant should have the skills and knowledge that he or she needs to perform the required functions. If you're going to hire an accountant, you need to know what qualifications to look for. Here are some guidelines for choosing the right person (or people) to enter and control the flow of your business’s data — and for making sure that those people remain the right people: College degree: Many accountants in business organizations have a college degree in accounting, but some got their bookkeeping methods and skills through on-the-job training. Although employees without an accounting degree may have good skills and instincts, they often lack the broader perspective necessary for improvising and being innovative. So, you want to at least look twice at a potential employee who has no college-based accounting background. CPA or CMA: When hiring an accountant in a business organization, determine whether he or she needs to be a certified public accountant (CPA). The other main professional accounting credential is the CMA, or certified management accountant, sponsored by the Institute of Management Accountants (IMA). Unlike the CPA license, the CMA designation of professional achievement is not regulated by the state. The CMA is evidence that the person has passed tough exams and has a good understanding of business accounting and income tax. Continuing education: Bookkeepers and accountants need continuing education to keep up with changes in the income tax law and financial reporting requirements, as well as changes in how the business operates. Fortunately, many short-term courses, home-study programs, and the like are available at very reasonable costs for keeping up on the latest accounting developments. When you hire an accountant, consider working his or her continuing education into your budget. It not only shows that you're committed to that accountant's future with the company, but it also guarantees that your books are kept according to the most recent guidelines and legislation. Integrity: What’s possibly the most important quality to look for is also the hardest to judge. Bookkeepers and accountants need to be honest people because of the control they have over your business’s financial records. Conduct a careful background check when hiring an accountant. As a small business owner, you have close day-in and day-out contact with your accountant, which can be a real advantage — you can get to know him or her on a personal level.

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